UC-NRLF 


GIFT  OF 


fln  Witness  Whereof 


By 
Harley  F.  Drollinger 

Manager,  New  Business  Department 

The  Fidelity  Trust  Company 

of  Buffalo 


The  Fidelity  Trust  Company 

of  Buffalo 


".   •::«•* 

•/  •  ' 


Copyright,  1922,  by 
THE  FIDELITY  TRUST  COMPANY  OF  BUFFALO 


TABLE   OF   CONTENTS 

Brenton  &  Company 7 

Depositary  Under  Reorganization  Plan 97 

Disbursing  Agent 105 

Escrows 115 

Fiscal  Agent  Under  Municipal  Bond  Issue 61 

Receiver— Assignee 121 

Registrar 55 

Safe  Keeping  Agent 91 

Transfer  Agent 35 

Protecting  the  Stockholder 40 

Problems  in  Connection  with  the   Transfer  of 

Stock 44 

Trustee  Under  Corporate  Bond  Issue 69 

Corporation  Bonds    Secured   by  Mortgages  on 

Real  Property 76 

Equipment  Trust  Bonds 78 

Collateral  Trust  Bonds 83 

Debenture  Bonds 85 

Voting  Trustee  .  Ill 


NOTE 

THE  business  romance  of  Brenton  & 
Company  has  been  made  a  part  of 
this  booklet  in  order  to  set  forth  some  of 
the  many  problems  actually  encountered 
by  every  corporation  at  one  time  or 
another  during  its  corporate  existence. 
The  solution  as  well  as  the  problem  has 
been  included  in  the  story  in  the  hope 
that  it  may  be  of  some  value  to  officers  of 
corporations  when  these  exigencies  arise. 

The  extent  to  which  a  trust  company 
may  economically  serve  and  promote  the 
best  interests  of  corporations  is  but  little 
recognized  and  appreciated  by  many 
executives. 

Believing  that  an  exposition  and  an 
understanding  of  the  mutual  relations 
between  corporations  and  trust  com- 
panies will  result  in  simplifying  many 
complicated  and  onerous  corporate 
activities  we  have  dedicated  our  booklet 
to  this  cause. 

Attention  is  called  to  the  many  points 
of  law  that  may  arise  in  connection  with 
the  corporate  problems  discussed  in  this 
booklet.  Corporate  executives  should  dis- 
cuss all  such  matters  in  detail  with  the 
corporation's  attorneys. 


BRENTON  &  COMPANY 

ALFRED  BRENTON  was  a  jobber  who  for  Alfred 
twelve  years  had  confined  his  business  Brenton 
activity  to  the  sale  of  woolen  goods.  He 
had  visited  several  large  mills  in  the  New 
England  States  on  many  occasions  and  had 
become  greatly  interested  in  the  various 
manufacturing  methods  employed  by  the 
larger  mills.  In  some  of  the  smaller  ones  he 
noticed  a  total  indifference  to  modern 
methods  of  manufacture.  If  the  improved 
and  more  economic  methods  of  the  larger 
mills  could  be  installed  in  one  of  the  smaller 
ones,  Brenton  felt  that  such  a  mill  would  be 
extremely  profitable. 

One  of  these  mills  could  be  found  in  Cor- 
dona,  a  city  having  a  population  of  90,000. 
Brenton  had  bought  some  of  their  goods  and 
found  them  of  very  high  quality.  He  was 
unable  to  obtain  the  supply  he  needed, 
however,  and  no  satisfaction  could  be  ob- 
tained as  to  possible  future  shipments,  so 
he  discontinued  the  line. 

On  one  of  his  Eastern  trips  he  stopped  off 
at  Cordona  and  went  to  the  mill.  They  had 
an  excellent  building,  some  very  good  ma- 
chinery, looms,  water  power  and  everything 

c  T  : 


V     ,'  ;.•;.  {'The  Fidelity  Trust  Company  of  Buffalo 

to  make  a  first  class  mill  from  a  mechani- 
cal standpoint.  Morale  and  spirit  among 
the  employees,  however,  were  utterly  lack- 
ing. The  indifference  of  the  management 
was  reflected  in  the  general  personnel  and 
Brenton  soon  realized  why  he  could  ob- 
tain no  service  from  the  mill.  A  call  at 
the  Cordona  Trust  Company  and  an  inter- 
view with  John  Strutts,  the  president,  con- 
firmed the  general  appraisal  Brenton  had 
The  Empire  made  of  the  situation.  Mr.  Strutts  said 
that  indifference  and  negligence  had  resulted 
in  the  loss  of  most  of  the  Empire  mill's 
customers.  Strutts  prophesied  a  liquidation 
of  the  Empire  in  the  near  future  unless 
their  policy  was  radically  changed.  Bren- 
ton frankly  told  the  bank  president  he  was 
interested  in  the  mill  and  asked  that  a  tele- 
gram be  sent  him  if  a  liquidation  of  the 
Empire  seemed  imminent. 

Seven  months  later  Brenton  received  a 
wire  from  Strutts  advising  him  to  come  at 
once  to  Cordona.  Upon  arrival  Brenton 
learned  that  the  Empire  mill  was  finan- 
cially involved  and  that  the  stockholders 
had  consented  to  a  liquidation  of  its  affairs. 

After  negotiations,  covering  a  period  of 
several  days,  Brenton  secured  an  option 
on  the  Empire  property  for  $85,000.  He 

E  8  ] 


"In  Witness  Whereof 


unfolded  his  plans  to  Mr.  Strutts,  President 
of  the  Cordona  Trust  Company,  who  offered 
his  support  in  the  undertaking.  This  was 
just  the  chance  Brenton  had  been  seeking. 
He  had  a  large  number  of  customers  whom 
he  had  been  serving  for  twelve  years  to  their 
entire  satisfaction.  The  Empire  mill  had  an 
excellent  reputation  for  quality  of  manu- 
factured goods,  but  their  service  had  been 
indifferent  and  most  unsatisfactory.  When 
he  returned  to  his  home  Brenton  had  little 
difficulty  in  gaining  the  support  of  several 
friends  who  advanced  sufficient  money  to 
pay  for  the  mill.  A  Corporation  was  formed  organization 
known  as  Brenton  &  Company.  Alfred  °fBrenton& 
Brenton  was  elected  President  and  General  ompany 
Manager  of  the  Company. 

A  meeting  of  the  employees  was  called 
and  Brenton  gave  an  extended  talk  to  a 
group  of  workers  who  totally  lacked  enthu- 
siasm and  spirit.  He  told  them  he  had 
built  up  a  large  trade  during  the  past  twelve 
years  as  a  jobber  and  that  he  had  now  de- 
cided to  become  a  manufacturer.  It  was 
his  desire  to  retain  the  services  of  all  em- 
ployees who  had  formerly  been  connected 
with  the  Empire  provided  they  took  a  new 
lease  on  life,  manifested  some  enthusiasm 
and  did  an  honest  day's  work.  Further,  it 

E  9  ] 


The  Fidelity  Trust  Company  of  Buffalo 

was  his  intention  to  allow  his  employees  to 
become  stockholders  in  the  corporation 
after  they  had  been  connected  with  the  com- 
pany continuously  for  eighteen  months. 
Special  consideration  would  be  given  to 
employees  who  discovered  methods  of  pro- 
ducing goods  more  economically,  and  for 
this  purpose  a  Suggestion  Box  would  be 
placed  in  the  office  where  it  would  be  easily 
accessible  to  all  employees. 

Two  weeks  later  Brenton  &  Company 
became  an  actual  entity  when  at  eight 
o'clock  on  Monday  morning  the  factory 
whistle  called  the  former  employees  back  to 
their  respective  positions.  Brenton  &  Com- 
pany was  a  vastly  different  organization 
from  what  the  Empire  mill  had  been. 

The  employees  liked  the  frankness  of 
their  employer  and  decided  to  do  their  part, 
feeling  confident  Brenton  would  live  up  to 
his  promises.  The  looms  hummed  in  the 
mill  during  the  next  three  years,  production 
was  greatly  increased  and  it  became  a  prob- 
lem to  sell  all  the  goods  produced. 

Brenton  needed  more  salesmen,  so  he 
decided  to  pick  from  his  employees  five  men 
who  could  learn  the  selling  end  of  the  busi- 
ness. Within  a  week  ten  men  had  been 
chosen  from  whom  Brenton  picked  five  of 

E  10  ] 


"In  Witness  Whereof 


the  most  promising.  Six  weeks1  training 
under  Brenton's  personal  supervision  pre- 
pared them  for  their  task.  They  started  on 
the  road  much  better  qualified  to  interview 
prospective  customers  on  a  business  basis 
than  most  salesmen  of  competitive  lines,  for 
they  all  had  practical  factory  experience  and 
knew  their  line  from  the  time  the  wool  left 
the  sheep's  back  until  it  was  woven  into  the 
various  patterns  and  boxed  for  shipment. 

It  was  at  this  time  that  Brenton  &  Com-  The 
pany  experienced  their  first  difficulty.  Four- 
teen  months  previous,  John  Kraver,  Bren-  Difficuity 
ton's  friend  and  business  associate,  had 
died.  He  was  the  owner  of  150  shares  of  the 
company's  stock.  The  executor  of  the 
estate  decided  to  sell  all  of  Kraver's  holdings 
and  convert  them  into  cash.  A  purchaser 
was  readily  found.  The  certificates  were 
endorsed  by  the  executor  of  Kraver's 
estate.  His  endorsement  was  properly 
witnessed  and  the  certificates  were  pre- 
sented to  Brenton  for  transfer  into  the 
name  of  the  purchaser.  The  transfer  had 
been  made  and  entered  on  the  books  of  the 
company.  When  the  executor  was  making 
final  distribution  of  the  estate  it  was  dis- 
covered that  Kraver  had,  by  his  will,  spe- 
cifically bequeathed  the  shares  of  stock  in 

[  11  1 


The  Fidelity  Trust  Company  of  Buffalo 

The  Brenton  &  Company  equally  to  his  three 

FhSPany'S     children-    The  value  of  the  stock  had  in- 
Difficuity       creased  materially  since  the  organization  of 

the  company.  Furthermore,  it  had  been 
very  closely  held  and  this  had  been  the  first 
sale  and  transfer.  The  three  children  de- 
manded the  150  shares  of  stock  which  had 
been  bequeathed  to  them. 

Kraver's  executor  had  not  been  required 
to  give  a  bond  though  he  personally  pos- 
sessed very  limited  means.  Therefore,  be- 
ing unable  to  recover  the  shares  from  the 
executor  of  the  estate,  Kraver's  children 
subsequently  made  a  demand  on  Brenton  & 
Company  for  150  shares  of  stock. 

Brenton  replied  that  the  executor  was 
responsible  and  that  they  must  look  to  him 
for  relief.  They  became  so  insistent  that 
Brenton  decided  to  consult  his  attorney 
regarding  the  situation.  He  was  very  much 
surprised,  and  shocked  as  well,  to  learn  that 
the  corporation  was  liable  to  the  beneficia- 
ries for  the  stock  transferred.  It  was  neces- 
sary, therefore,  for  the  corporation  to  pro- 
vide Kraver's  heirs  with  the  stock  which  had 
been  transferred.  Owing  to  the  fact  that  the 
executor  was  not  required  to  give  bond,  and 
also  that  he  was  not  financially  able  to  make 
good,  a  loss  to  the  corporation  resulted. 

:  12  : 


"In  Witness  Whereof 


He  related  his  experience  to  Strutts, 
his  banker  friend,  and  was  told  that  the 
law  required  a  corporation  to  protect  the 
interests  of  bona  fide  stockholders  in  the 
event  that  certificates  were  improperly 
transferred,  stolen  or  forged.  He  was  fur- 
ther informed  that  these  were  only  a  few 
of  the  many  intricate  problems  to  be  met 
in  handling  stock  transfers. 

Having  had  this  experience  Brenton  was  Future 
anxious  to  learn  whether  there  was  some 
way  by  which  his  company's  interests  might 
be  safeguarded.  Strutts  replied  that  the 
Cordona  Trust  Company  acted  as  trans- 
fer agent  for  many  large  corporations  which 
did  not  consider  themselves  qualified  to 
pass  upon  the  many  questions  that  arose 
in  connection  with  the  transfer  of  their 
securities.  After  thoroughly  investigating 
the  facilities  of  a  trust  company  for  this 
purpose,  Brenton  decided  to  have  the  Cor- 
dona Trust  Company  act  as  transfer  agent 
for  the  stock  of  Brenton  &  Company.  The 
necessary  formalities  were  complied  with 
and  all  transfers  thereafter  were  passed 
upon  by  the  trust  company  which  spe- 
cialized in  that  class  of  work,  and  no  fur- 
ther financial  loss  in  this  connection  was 
experienced. 

E  13  n 


The  Fidelity  Trust  Company  of  Buffalo 

The  sales  force  had  been  exceedingly  ener- 
getic, and  the  quality  of  Brenton's  woolens 
was  so  satisfactory  that  he  became  deluged 
with  orders  and  as  a  result,  delivery  be- 
came a  serious  problem.  The  situation 
became  so  acute  that  Brenton  had  to  plan 
an  expansion  of  the  factory.  He  was  con- 
fronted  with  considerable  difficulty  in 
financing  the  proposition.  Together  with 
his  bankers  he  went  over  the  problem  in 
detail,  and  after  some  discussion  Strutts 
advised  him  not  to  sell  the  readily  market- 
able securities  in  which  their  reserve  and 
surplus  had  been  invested,  but  if  possible  to 
meet  the  situation  by  selling  an  issue  of 
preferred  stock.  The  surplus  and  reserve 
could  be  held  as  an  emergency  fund  and  the 
company  could  maintain  a  strong  position 
with  which  to  meet  any  sudden  and  un- 
expected financial  demand,  which  proved  to 
be  a  valuable  precaution.  Strutts  was  able 
to  be  of  considerable  assistance  to  Brenton. 
The  sale  of  the  preferred  stock  was  author- 
ized by  the  stockholders,  who  subscribed  for 
part  of  the  issue,  and  the  balance  was  sold 
largely  to  their  customers  in  small  blocks. 
It  was  promptly  subscribed  and  Brenton  had 
thereby  accomplished  a  three-fold  purpose; 
he  had  financed  the  expansion  of  the  factory; 

L  14  1 


"In  Witness  Whereof 


he  still  held  the  company's  surplus  and 
reserve  fund  intact;  and  finally,  he  had  tied 
his  customers  to  Brenton  &  Company  with 
the  bond  of  ownership. 

In  order  to  safeguard  equally  the  interests  PI 
of  the  preferred  and  common  stockholders,  ^toc^" 
the  Cordona  Trust  Company  was  appointed  interests 
transfer  agent  of  the  preferred  stock  as  well 
as  of  the  common.    As  an  additional  pre- 
caution the  Soverill  Trust  Company  of  the 
same  city  was  appointed  registrar  of  the 
preferred  stock.    As  registrar,  the  Soverill 
Trust   Company  countersigned  each  cer- 
tificate, vouched  for  the  fact  that  it  was  one 
of  the  duly  authorized  issue  and  thereby 
certified  that  the  amount  legally  authorized 
was  not  over-issued. 

In  differentiating  between  the  duties  of  a 
transfer  agent  and  a  registrar,  Strutts  ex- 
plained that  the  transfer  agent  passed  upon 
the  title  to  the  property  and  that  the  regis- 
trar recorded  the  transfer.  No  man  would 
buy  a  piece  of  real  estate  until  a  search  was 
made  to  assure  the  purchaser  that  the  title 
was  clear,  nor  would  the  same  man  fail  to 
have  his  deed  properly  recorded.  Likewise, 
no  transfer  of  stock  should  be  made  where 
the  title  is  irregular  or  in  doubt.  The  title 
having  been  approved  and  the  transfer 

C   15   ] 


The  Fidelity  Trust  Company  of  Buffalo 

made,  it  should  become  a  matter  of  record 
on  the  registrar's  books. 

On  the  following  dividend  date  Brenton 

complained  of  the  details  and  additional 

work  imposed  upon  his  cashier  in  mailing 

dividend   checks.     Mr.   Strutts   explained 

Avoiding       that  the  trust  company  assumed  details  of 


clerical  ft£s  nature  for  other  large  corporations  and 
relieved  them  of  this  burden.  Acting  as  a 
disbursing  or  financial  agent  the  trust  com- 
pany received  one  check  from  the  corpo- 
ration to  cover  the  total  amount  of  divi- 
dends. This  ended  the  matter  so  far  as  the 
corporation  was  concerned.  The  trust  com- 
pany made  out  individual  dividend  checks, 
addressed,  stamped  and  mailed  the  en- 
velopes. In  the  event  of  an  inaccurate 
address  a  search  was  made  for  the  correct 
one.  With  its  large  clerical  force  and  special 
organization  such  a  matter  was  compara- 
tively easy  for  the  trust  company  whereas 
it  would  be  somewhat  burdensome  for  a 
corporation  not  organized  for  such  pur- 
poses. 

After  an  interview  with  the  heads  of 
other  corporations  who  had  made  such 
arrangements  with  the  trust  company  Bren- 
ton immediately  adopted  a  similar  plan  and 
appointed  the  Cordona  Trust  Company 

L  16  3 


"In  Witness  Whereof 


financial  agent  for  his  corporation.  There- 
after the  treasurer  mailed  a  single  check  to 
the  trust  company  prior  to  the  dividend 
date,  covering  the  entire  amount  of  the 
preferred  and  common  stock  dividends. 
It  was  then  up  to  the  trust  company  to 
make  out  and  mail  separate  dividend 
checks  to  individual  stockholders  and  to 
see  that  these  checks  reached  the  proper 
hands. 

During  the  next  six  years  Brenton  &  Building  a 
Company  with  its  new  factory  greatly  ex- 
panded its  business.  The  earnings  were 
large  and  the  net  profits,  in  excess  of  divi- 
dend requirements,  were  placed  in  a  reserve 
account  to  cover  future  contingencies.  The 
reserve  was  invested  in  high  grade  bonds, 
carrying  an  interest  rate  of  5%.  Being 
well  known  listed  bonds  they  were  readily 
marketable  and  could  be  converted  into 
cash  on  very  short  notice.  Thus,  if  the 
company  were  in  need  of  additional  funds 
they  could  easily  turn  to  their  reserve 
fund.  A  line  of  credit  had  been  estab- 
lished at  the  bank,  but  Brenton  had  never 
used  more  than  one-half  the  amount  to 
which  he  was  entitled  because  his  business 
had  been  excellent  and  collections  very 
prompt. 

E  IT  n 


The  Fidelity  Trust  Company  of  Buffalo 


Export 
Markets 


Clouds  on 
the  Horizon 


Brenton  &  Company  established  a  coun- 
try-wide reputation  for  the  quality  of  their 
product  which  soon  found  its  way  to  South 
American  countries,  and  eventually  a  de- 
mand for  Brenton's  woolens  became  very 
brisk  in  Brazil,  Argentina  and  Uruguay.  In 
order  to  promote  relations  with  his  cus- 
tomers in  South  America  Brenton  person- 
ally made  a  trip  to  the  several  countries, 
which  required  six  months  absence  from  the 
factory.  In  addition  to  getting  a  line  on  the 
possibilities  of  South  American  markets, 
Brenton  also  studied  the  habits  of  the 
people,  their  banking  methods,  as  well  as  the 
general  credit  situation.  He  personally 
booked  a  large  volume  of  business  in  addi- 
tion to  making  a  general  appraisal  of  the 
business  conditions.  The  latter  was  of  con- 
siderable value  to  his  Export  Department. 

Upon  his  return  Brenton  was  confronted 
with  a  serious  situation.  A  large  corpora- 
tion, owning  considerable  properties  in 
various  sections  of  the  country  including 
silk,  cotton  and  woolen  mills,  had  been 
watching  the  progress  and  expansion  of 
Brenton  &  Company  and  decided  to  obtain 
control  of  the  mill.  Through  various  indi- 
viduals they  had  accumulated  40%  of  the 
stock  in  Brenton  &  Company,  which  would 

L  18  : 


"In  Witness  Whereof 


virtually  control  the  company  unless  Bren-  Trouble 
ton  could  in  some  way  tie  up  the  other  35%,  Brewing 
as  he  personally  owned  but  25%  of  the 
stock.  Brenton  called  on  Strutts  to  obtain 
a  personal  loan  for  the  purpose  of  buying 
a  majority  of  the  outstanding  stock.  The 
other  crowd  were  just  as  eager  and  the 
price  rose  so  rapidly  that  Brenton's  loan 
was  soon  exhausted  and  he  had  secured  but 
10%  more  of  the  stock.  His  adversaries  had 
accumulated  an  additional  5%  and  the  odds 
were  badly  against  Brenton,  for  they  had 
unlimited  funds  for  the  operation  while 
Brenton  had  reached  the  limit  of  his  per- 
sonal resources.  He  now  controlled  35%  of 
the  company's  stock  and  his  adversaries 
controlled  45%.  The  situation  was  very 
critical  and  seemed  hopeless.  Brenton 
decided  to  call  upon  Strutts  to  save  the 
situation,  if  possible.  It  so  happened  that 
the  other  20%  of  stock  was  held  by 
several  of  Brenton's  friends  who  were  lo- 
cated in  the  city  where  Brentcn  formerly 
resided.  Up  to  this  time  his  adversaries 
had  not  succeeded  in  locating  these  stock- 
holders. Brenton  was  financially  unable 
to  purchase  the  stock,  so  Strutts  advised 
him  to  call  upon  the  holders  at  once 
to  discuss  the  situation  with  them.  Both 

E  19  ] 


The  Fidelity  Trust  Company  of  Buffalo 

Brenton  and  Strutts  left  for  the  West  that 
night.  On  the  following  day  they  called  the 
stockholders  together  and  explained  exist- 
ing conditions.  Brenton's  friends  were  very 
much  alarmed  and  explained  that  they  had 
originally  gone  into  the  company  because 
of  their  knowledge  of  Brenton's  ability  and 
integrity.  They  did  not  want  to  sell  their 
stock  because  of  the  attractive  dividend 
return,  nor  did  they  care  to  remain  in  the 
company  if  Brenton's  absolute  control  was 
to  be  jeopardized  in  any  manner.  Therefore, 
to  safeguard  their  mutual  interests,  their 
stock  and  that  of  Brenton,  which  together 
constituted  55%  of  the  amount  outstanding, 
was  tied  up  in  a  voting  trust  for  five  years. 
The  Cordona  Trust  Company  was  made 
trustee  to  vote  the  stock  for  the  election  of 
The  storm  directors  in  accordance  with  the  terms  of 
the  trust  agreement,  and  the  control  of 
Brenton  &  Company  was  therefore  guaran- 
teed throughout  the  term  of  the  voting 
trust.  Under  the  conditions  of  the  agree- 
ment any  individual  desiring  to  sell  his 
stock  during  that  period,  was  obliged  to 
give  the  other  parties  to  the  agreement  two 
weeks'  option  to  purchase  it.  The  stock 
affected  by  the  voting  trust  was  endorsed 
over  to  the  Cordona  Trust  Company, 

E  20  3 


"In  Witness  Whereof1 


which  in  turn  issued  trustees'  certificates 
as  receipts  for  stock  so  deposited.  When 
the  voting  trust  terminated,  the  several 
parties  who  had  worked  so  closely  together 
during  the  past  five  years  continued  their 
relationship  on  substantially  the  same  terms 
and  conditions  as  outlined  in  the  voting 
trust  agreement. 

For  nearly  eight  years  business  had  been 
prosperous,  money  rates  were  low  and  the  8ion 
greatest  optimism  prevailed.  During  the 
last  eighteen  months  of  this  period,  while 
all  business  was  booming,  expansion  seemed 
the  day's  order  and  money  values  became 
greatly  inflated.  Brenton  &  Company,  like 
all  others,  was  inoculated  with  the  germ. 
Its  foreign  business  had  developed  and 
grown  to  a  surprising  degree;  domestic 
business  had  greatly  increased,  and  Brenton 
&  Company  was  using  its  full  line  of  credit 
at  the  bank.  The  company  could  not  make 
prompt  delivery  of  all  the  orders  booked, 
and  it  became  necessary  to  expand  the  plant. 
Brenton  consulted  his  banker,  Mr.  Strutts, 
who  advised  him  to  finance  the  expansion 
program  by  an  issue  of  bonds  secured  by  a 
first  mortgage  on  the  property.  Interest 
rates  had  been  rising  and  were  at  that  time 
high,  so  that  any  liquidation  of  bonds  in  the 

21 


The  Fidelity  Trust  Company  of  Buffalo 


Overexpan- 


sion 


Inflation 


reserve  fund  would  necessitate  considerable 
loss  as  they  were  then  quoted  at  about  80. 
Strutts  advised  that  the  company  issue 
short  term  first  mortgage  bonds  bearing 
7%.  The  Cordona  Trust  Company  held  the 
mortgage  to  the  property  as  trustee  of  the 
bond  issue  since  individual  mortgages  to 
each  purchaser  would  be  out  of  the  question. 
Brenton  &  Company  had  an  excellent 
financial  standing  and  the  issue  was  soon 
absorbed  by  the  investing  public.  The 
additions  to  the  plant  were  completed  and 
the  machinery  installed  within  six  months 
and  production  was  greatly  stimulated. 
Practically  all  of  the  increased  production 
was  exported  to  South  America,  and  for  a 
time  it  seemed  that  even  the  accelerated 
production  would  be  insufficient  to  meet  the 
export  demand.  At  this  point,  however, 
war  broke  out  between  three  South  Ameri- 
can countries,  which  utterly  demoralized  the 
export  market.  Goods  which  had  been 
shipped  were  refused  at  the  ports,  letters  of 
credit  were  revoked,  and  Brenton  &  Com- 
pany was  in  a  sad  plight  indeed. 

Domestic  business  had  been  repeatedly 
warned  that  inflation  had  reached  such 
proportions  that  curtailment  was  necessary 
if  an  actual  crisis  was  to  be  prevented,  and 

:  22  3 


"In  Witness  Whereof 


that  emergency  brakes  must  be  applied  to 
the  wheels  of  expansion.  Optimism  was  so  stasnation 
rampant,  however,  that  only  a  sudden  rise 
of  the  rediscount  rates  could  bring  about  a 
sane  and  conservative  program.  With  the 
readjustment  there  came  a  severe  business 
depression.  This,  coupled  with  the  situation 
in  Brenton's  export  market,  presented  a 
very  acute  problem.  His  purchases,  labor, 
raw  materials,  etc.,  had  to  be  paid  for;  his 
export  goods  were  tied  up  in  foreign  ports; 
domestic  demand  struck  the  snag  of  a  buy- 
ers' strike;  money  rates  were  high,  and  he 
had  used  up  his  entire  banking  line.  How 
could  the  situation  be  met?  Strutts,  his 
banker,  went  over  every  detail  of  the  com- 
pany's affairs  with  him.  He  still  had  the 
reserve  to  fall  back  on,  but  liquidation 
would  mean  a  serious  loss,  as  the  securities 
had  fallen  to  approximately  74.  Strutts 
advised  him  to  issue  three-year  collateral 
trust  bonds  at  8%.  All  of  the  bonds  in  the 
reserve  fund  were  deposited  with  the  Cor- 
dona  Trust  Company  which  held  them  as 
trustee,  to  safeguard  the  investment  of  the 
bondholders.  With  some  difficulty  the  issue 
was  floated  and  the  company's  affairs  were 
tided  over. 

The  dissension  in  South  America  was  of 

E   23   3 


The  Fidelity  Trust  Company  of  Buffalo 

Revival  of  short  duration.  Fourteen  months  later  the 
war  had  ceased  and  they  were  on  a  sane 
constructive  basis.  Brenton  had  stored  his 
merchandise  in  warehouses  when  the  trouble 
broke  out;  therefore,  when  conditions  again 
became  normal  he  was  the  only  manufac- 
turer who  could  make  immediate  delivery. 
Business  having  been  at  a  standstill  for 
months,  an  active  demand  for  woolens 
arose  when  the  clouds  of  war  were  blown 
aside.  Brenton  received  high  prices  for  his 
merchandise  because  he  could  make  im- 
mediate delivery.  He  promptly  prepared  to 
keep  up  a  constant  supply  by  setting  his 
factory  again  in  motion.  Having  been 
ready  for  instant  delivery  when  the  demand 
arose,  he  occupied  a  premier  position  with 
respect  to  future  orders.  His  large  export 
business,  together  with  the  high  prices 
received  for  merchandise,  compensated  for 
the  domestic  depression  which  lasted  for 
nearly  three  years.  Profits  from  this  large 
export  business  enabled  him  to  build  up 
substantial  reserves  with  which  to  pay  the 
collateral  trust  bonds  when  they  became 
due. 

All  coupons  and  bonds  were  carefully 
checked  by  the  Cordona  Trust  Company 
and  destroyed.  The  company's  collateral 

n  24  : 


"In  Witness  Whereof 


was  returned  to  it;  thus  the  reserve  fund 
still  remained  intact  and  the  company  was 
in  a  strong  financial  position  again. 

By  the  close  of  the  business  depression 
money  had  become  more  plentiful.  Re- 
serves had  accumulated  in  the  banks  and 
bonds  forming  the  reserve  fund  had  risen 
steadily  in  price  to  96,  which  was  a  con- 
siderable recovery  from  their  low  point  in 
the  early  stage  of  the  depression. 

While  the  company's  bonds  were  held  by  investment 
the  Cordona  Trust  Company  it  received  Safeguards 
semi-annually  a  report  in  detail  concerning 
every  security  constituting  the  reserve  fund 
which  had  been  deposited  as  collateral  for 
the  short  term  bonds.  This  appealed  par- 
ticularly to  the  treasurer  of  Brenton  &  Com- 
pany, for  he  had  before  him  a  review  of  the 
condition  of  the  securities  from  financial 
experts  which  he  could  not  hope  to  match 
since  he  was  unable  to  spare  the  time  neces- 
sary for  such  purposes.  Furthermore,  his 
company  could  not  afford  to  spend  the 
amount  of  money  required  for  the  various 
financial  services,  magazines  and  period- 
icals used  by  the  bank,  as  their  holdings 
would  not  warrant  such  an  expenditure.  He 
approached  Strutts  to  see  if  arrangements 
could  not  be  made  whereby  the  trust 

:  25  n 


The  Fidelity  Trust  Company  of  Buffalo 

company  would  continue  to  hold  the  securi- 
ties of  their  reserve  fund  and  give  them  the 
same  care  they  had  received  while  deposited 
as  collateral  for  the  short  term  bonds.  Mr. 
Strutts  took  him  into  the  huge  vault  and 
pointed  to  a  number  of  large  compartments 
which  were  securely  locked  and  safeguarded, 
investment  "In  there,"  said  Strutts,  "are  securities 
safeguards  worth  millions  of  dollars.  They  belong  to 
individuals  and  corporations  who  are  too 
busy  to  look  after  them  properly.  Our  safe- 
keeping department  is  responsible  for  their 
physical  safety.  We  cut  the  coupons, 
credit  them  to  the  various  accounts,  sign 
ownership  certificates,  and  search  our  finan- 
cial publications  and  services  for  possible 
information  concerning  them.  If  we  ob- 
serve any  interesting  data  concerning  any 
of  the  securities,  such  information  is 
promptly  forwarded  in  concise  form  to  the 
individual  or  corporation  under  whose  ac- 
count it  is  lodged." 

Brenton  &  Company  transferred  its  secur- 
ities to  the  Cordona  Trust  Company  under 
a  safekeeping  account,  and  found  it  of  such 
great  value  that  several  officials  of  the 
company  likewise  opened  safekeeping  ac- 
counts for  their  personal  securities. 

In  certain  South  American  countries  the 

[   26    3 


"In  Witness  Whereof" 


company's  agents  found  considerable  diffi-  The 
culty  in  selling  their  goods.     The  trade  Demand  for 

,  ,  ,.  T  Cheaper 

demanded  cheaper  quality.  In  some  Goods 
sections  of  the  United  States  a  like  demand 
had  grown  for  cheaper  goods.  Having 
inspired  the  employees  of  Brenton  &  Com- 
pany with  a  zeal  for  quality,  Brenton 
decided  that  cheaper  goods,  if  manufactured 
at  all,  must  be  made  at  an  entirely  different 
mill.  He  had  been  seeking  such  a  factory 
for  some  time  when  the  secretary  of  the 
Cordona  Chamber  of  Commerce  called  him 
on  the  telephone  and  informed  him  that  the 
Regis  mill  at  Eureka  was  in  financial  diffi-  The  Regis 
culties  and  that  he  thought  a  deal  could  be 
made  with  them.  Brenton  arrived  at 
Eureka  the  next  day  and  found  that  the 
Regis  management  had  made  purchases 
far  beyond  their  capacity  to  pay.  A  large 
consignment  of  wool  had  been  offered  in 
Boston  at  a  sacrifice  price  and  the  Regis 
mill,  being  over  zealous  to  gain  an  advan- 
tage over  certain  competitors,  bought  the 
entire  lot.  Business  had  slackened  and  they 
were  unable  to  meet  their  bills.  Brenton 
had  been  on  the  ground  studying  the  situa- 
tion for  several  days  when  he  called  at  the 
Eureka  Trust  Company  and  found  that 
certain  parties  were  determined  to  force 

i  27  : 


The  Fidelity  Trust  Company  of  Buffalo 

collection  of  their  accounts  by  petitioning 
for  a  receiver.  Brenton  was  well  satisfied 
with  the  mill  and  felt  that  it  could  pull  out 
of  present  financial  difficulties  if  allowed 
sufficient  time  to  do  so.  He  personally  took 
up  the  claims  of  the  three  firms  who  were 
about  to  force  the  issue.  To  prevent  similar 
action  by  other  hostile  parties  he  petitioned 
the  court  for  a  reliable  and  non-interested 
receiver.  The  Eureka  Trust  Company  was 
appointed.  With  its  special  facilities  it 
succeeded  in  liquidating  the  debts  of  the 
company  in  five  months. 

Purchase  of  The  working  capital  of  the  Regis  mill  was 
exhausted  and  there  were  no  funds  with 
which  to  carry  on  the  business.  Having 
been  in  financial  straits  capital  would  hesi- 
tate before  coming  into  the  concern.  Bren- 
ton, having  agreed  to  assume  all  liabilities 
of  the  company  made  a  deal,  subject  to  the 
court's  approval,  whereby  he  agreed  to  buy 
the  mill,  paying  for  it  by  issuing  stock  in 
Brenton  &  Company  on  the  basis  of  one 
share  of  Brenton  &  Company  for  three 
shares  of  Regis  mill  stock.  The  Cordona 
Trust  Company  was  appointed  depositary  to 
effect  the  exchange  of  securities.  All  shares 
of  the  Regis  mill  stock,  properly  endorsed, 
were  deposited  with  the  Cordona  Trust 

n  28  3 


"In  Witness  Whereof 


Company.  Temporary  trust  receipts  were  Exchange 
given  to  the  owners  thereof  until  new  certi- 
ficates were  engraved.  When  the  certifi- 
cates were  engraved  the  temporary  receipts 
were  called  in  by  the  trust  company  for 
conversion  into  permanent  certificates  rep- 
resenting the  ownership  of  shares  in  Bren- 
ton  &  Company. 

In  order  to  put  the  mill  in  first  class 
condition  considerable  improvements  were 
decided  upon  which  involved  the  con- 
struction of  additions  to  the  factory  and 
a  suitable  warehouse.  When  bids  were 
taken  it  was  found  that  a  local  contrac- 
tor's proposal  was  by  far  the  lowest  fig- 
ure submitted.  He  was,  however,  unknown 
to  Brenton  who  seemed  somewhat  dubious 
as  to  his  ability  to  fulfill  the  construction 
contract. 

A  local  banker  who  was  acquainted  with  Financing 
the  contractor  agreed  to  loan  him  the  money  *he  New 
to  complete  the  job  if  Brenton  would  de-  Additions 
posit  a  certified  check  in  escrow  to  be  de- 
livered upon  satisfactory  completion  of  the 
buildings.   The  check  was  placed  in  escrow 
with  the  Eureka  Trust  Company  which 
delivered  it  to  the  banker  when  the  contract 
had  been  fulfilled.    In  this  manner  both 
time  and  expense  had  been  saved  in  the 

E   29    ] 


The  Fidelity  Trust  Company  of  Buffalo 

erection  of  buildings  by  a  contractor  whose 
ability  was  unknown  to  Brenton. 

Brenton  &  Company  now  had  a  well 
rounded  organization  to  produce  any 
quality  of  goods  demanded  by  either  domes- 
tic or  foreign  trade;  and  here  we  leave 
them,  a  large,  progressive  organization 
forged  by  the  many  tempering  fires  which 
usually  attend  the  career  of  a  progressive 
and  prosperous  manufacturing  organization. 


Coincident  with  the  evolution  and  great 
financial  growth  of  corporations  within  the 
last  generation  there  have  developed  in- 
numerable duties  of  a  fiduciary  or  public 
trust  nature. 

Corporate  It  was  at  once  apparent  that  a  trustee 
having  the  necessary  qualifications  of  con- 
tinuous existence,  responsibility,  experience, 
impartiality,  constant  application  to  duty, 
complete  accounting  system,  freedom  from 
\  sickness,  disability  and  infirmity,  could  be 

provided  only  by  a  corporation  organized 
for  that  specific  purpose. 

Laws  were  therefore  enacted  authorizing 
the  organization  of  trust  companies.  Their 
development  and  tremendous  growth  has 

E  30  : 


"In  Witness  Whereof 


been  little  short  of  phenomenal.  It  has 
recently  been  stated  that  trust  companies 
are  now  performing  trust  duties  in  connec- 
tion with  corporate  securities  worth  ap- 
proximately twelve  billion  dollars. 

Problems  identical  with  those  of  Brenton 
&  Company  may  be  encountered  by  any 
corporation.  The  various  services  rendered 
by  trust  companies  are  merely  mentioned 
in  the  story  without  explanation.  Each  is, 
however,  discussed  under  separate  headings 
on  the  following  pages  of  this  brochure. 

For   many    years    The    Fidelity    Trust  The  Fidelity 
Company  of  Buffalo  has  been  extremely 

j-.        •  '    4.1  •     /•   i j          j  •      Company  of 

active  in  this  neld,  and  as  a  consequence  is  Buffa]0 
eminently  qualified  and  well  equipped  to 
perform  trust  duties  of  any  nature.  Further 
discussion  of  these  services  either  in  person 
or  by  correspondence  is  unreservedly  wel- 
comed. 


TRANSFER  AGENT 


TRANSFER  AGENT 

IN  the  State  of  New  York  a  corporation  in  Transfer 
its  simplest  form  may  consist  of  three  in-  A2eitt 
dividuals,  who  together  subscribe  capital 
stock  of  $500.00.    Three  directors  are  re- 
quired;   therefore  these  same  individuals 
may  constitute  the   Board   of   Directors. 
When  the  $500.00  of  capital  stock  is  all  paid 
in  and  the  organization  completed  the  cor- 
poration may  legally  begin  to  function. 

Each  of  the  stockholders  receives  a  certi- 
ficate which  is  evidence  of  the  ownership  of 
a  certain  number  of  shares  of  the  capital 
stock.  Ownership  of  shares  in  a  corporation 
is  personal  property  which  may  be  trans- 
ferred by  one  individual  to  another.  The 
stock  certificate,  like  a  deed  of  real  estate,  is 
simply  evidence  of  ownership  of  the  prop- 
erty which  it  represents;  and  the  loss  or 
destruction  of  either  does  not  mean  that  the 
actual  owner  loses  his  equity  in  the  shares  of 
the  corporation  in  the  first  instance,  or  the 
real  estate  in  the  latter  case.  Upon  satisfac- 
tory proof  of  loss,  together  with  proper 
guarantee,  a  new  certificate  may  be  issued. 
If  a  deed  to  certain  real  property  is  forged 
it  does  not  follow  that  the  bona  fide  owner  of 

L   35   ] 


The  Fidelity  Trust  Company  of  Buffalo 

the  property  loses  it.  Likewise,  the  owner  of 
shares  in  a  corporation  does  not  lose  his 
property  if  a  certificate  or  an  endorsement 
is  forged.  The  stock  record  of  a  corporation 
is  somewhat  similar  to  the  books  of  record 
in  which  real  estate  transfers  are  recorded. 
Upon  the  stock  records  a  complete  history 
of  the  shares  of  stock  may  be  traced,  and 
in  each  case  the  keeper  of  the  records  must 
be  sure  that  the  transfer  of  ownership  is 
absolute  and  genuine.  In  the  case  of  stock 
he  must  be  sure  that  the  endorsement  is 
genuine,  not  forged,  and  that  the  individual 
seeking  the  transfer  is  actually  entitled  to 
the  stock.  Formerly,  officers  of  a  corpora- 
tion kept  the  stock  book,  ledger  and  other 
books  of  record  and  made  all  stock  transfers 
as  well.  Because  of  the  responsibilities  in- 
volved, well  managed  corporations  now 
assign  these  duties  to  trust  companies, 
which  have  departments  organized  for  this 
specific  purpose. 

In  the  simplest  form  of  corporation  men- 
tioned above,  transfers  of  stock  may  not  be 
so  numerous,  but  the  duties  and  responsi- 
bilities in  this  respect  are  as  great  as  those 
of  a  corporation  having  a  capital  of  mil- 
lions. Each  State  has  adopted  its  own  laws 
governing  corporations,  and  those  of  each 

:  36 


"In  Witness  Whereof 


State  are  uniform  regardless  of  whether  Transfer 
such  corporations  be  of  the  simplest  nature  Agent 
having  a  capital  of  $500.00,  or  the  largest 
with  a  capital  of  many  millions.  On  the 
following  pages  a  questionnaire  has  been 
introduced  to  set  forth  a  few  of  the  many 
problems  with  which  a  transfer  agent  is 
constantly  confronted.  By  referring  to  this 
questionnaire  executives  of  a  corporation 
may  be  greatly  astonished  at  the  numerous 
intricate  problems  involved  in  the  transfer 
of  stock  under  present  laws,  any  one  or  all 
of  which  may  occur  in  any  corporation. 

In  the  early  history  of  our  country  cor- 
porations were  few  and  transfers  infrequent. 
Likewise  laws  governing  corporations  were 
very  simple.  With  the  growth  and  develop- 
ment of  America,  however,  it  became  neces- 
sary to  marshal  our  national  resources  to 
develop  properly  our  inherent  wealth. 
Therefore  thousands  of  corporations  have 
been  organized  and  the  various  States  have 
kept  pace  with  the  movement  by  constant 
change  and  development  of  corporation 
laws  to  protect  fully  the  interests  of  stock- 
holders. 

When  trading  in  stocks  of  various  cor- 
porations became  more  active  it  was  natural 
that  a  considerable  proportion  of  such 

E    37    ] 


The  Fidelity  Trust  Company  of  Buffalo 

trading  should  be  done  in  New  York  City. 
With  thousands  of  shares  changing  hands 
daily  it  was  found  both  laborious  and  un- 
safe to  send  securities  by  mail  to  the  various 
offices  of  corporations,  located  throughout 
the  country  for  transfer.  Therefore  the  New 
York  Stock  Exchange  adopted  a  regulation 
requiring  every  corporation  whose  stock  was 
listed  on  the  exchange  to  appoint  as  transfer 
agent  a  trust  company  or  other  duly  quali- 
fied agent  in  New  York  City  to  facilitate 
the  work.  Subsequently  other  large  cities 
adopted  similar  regulations.  It  can  readily 
be  seen  that  the  trust  company  was  origi- 
nally chosen  transfer  agent  as  a  matter  of 
convenience. 

Fraud,  theft  and  forgeries  in  connection 
with  stock  certificates  ultimately  became  so 
frequent  with  consequent  losses  to  stock- 
holders that  the  different  States  were  com- 
pelled constantly  to  change  their  corpora- 
tion laws  to  meet  various  emergencies.  The 
full  responsibility  was  placed  upon  the  cor- 
poration whose  stock  was  being  transferred. 
In  this  way  the  loss  was  passed  on  to  the 
corporation,  making  it  the  duty  of  officers 
to  see  that  all  rights  of  stockholders  had 
been  properly  recognized.  This  required  con- 
stant vigilance  to  keep  pace  with  new  laws 

[    38    1 


"In  Witness  Whereof 


that  might  be  enacted  to  safeguard  stock-  Transfer 
holders'  interests.  An  arduous  task  was  thus 
added  to  the  duties  of  officers  whose  time 
could  be  utilized  with  greater  profit  to  the 
corporation  when  directed  in  other  channels. 
As  a  result  corporations  now  appoint  trust 
companies  to  act  as  transfer  agents  for  their 
capital  stock,  not  merely  as  a  matter  of  con- 
venience, but  for  the  sake  of  safety.  Hun- 
dreds of  corporations,  both  large  and  small, 
whose  stock  is  not  listed  on  stock  exchanges, 
now  use  trust  companies  as  their  transfer 
agents  in  order  to  take  advantage  of  the 
superior  equipment  of  the  modern  trust 
company,  and  at  the  same  time  avoid  the 
burdensome  clerical  work  involved. 

With  a  special  department  devoted  to  this 
work,  and  with  a  large  volume  of  this  class 
of  business,  a  trust  company  can  afford  to 
keep  constantly  in  contact  with  the  activi- 
ties of  various  State  legislatures.  Thus  it 
becomes  familiar  with  any  changes  in  cor- 
poration laws  which  may  be  enacted,  and  is 
able  to  prevent  considerable  loss  to  the 
corporation. 

A  few  of  the  many  decisions  of  courts  in 
this  respect  are  here  given  to  show  the  great 
risk  involved  in  the  transfer  of  corporate 
stock. 

E  39  3 


The  Fidelity  Trust  Company  of  Buffalo 


Transfer 
Agent 

Responsibili- 
ties Involved 
in  Transfer  of 
Corporate 
Stock 


PROTECTING  THE  STOCKHOLDER 

(U.  S.  Supreme  Court:  Telegraph  Com- 
pany vs.  Davenport  97  U.  S.  369  at  page 
371).  "The  officers  of  the  company  are 
custodians  of  the  stock  book,  and  it  is  their 
duty  to  see  that  all  transfers  of  shares  are 
properly  made  either  by  the  stockholders 
themselves  or  persons  having  authority 
from  them.  If,  upon  the  presentation  of  a 
certificate  for  transfer,  they  are  at  all  doubt- 
ful of  the  identity  of  the  party  offering  it  as 
its  owner,  or  if  not  satisfied  of  the  genuine- 
ness of  a  power  of  attorney  produced,  they 
can  require  the  party  in  the  one  case  and 
the  genuineness  of  the  document  in  the 
other,  to  be  satisfactorily  established  before 
allowing  the  transfer  to  be  made.  In  either 
case  they  must  act  upon  their  own  responsi- 
bility. In  many  instances  they  may  be 
misled  without  any  fault  of  their  own,  just 
as  the  most  careful  person  may  sometimes 
be  induced  to  purchase  property  from  one 
who  has  no  title  and  who  may  perhaps 
have  acquired  its  possession  by  force  or 
larceny.  Neither  the  absence  of  blame  on 
the  part  of  the  officers  of  the  company  in 
allowing  unauthorized  transfer  of  stock  nor 
the  good  faith  of  the  purchaser  of  stolen 

E  40  : 


"In  Witness  Whereof 


property  will  avail  as  an  answer  to  the  de-  Transfer 
mand  of  the  true  owner." 

,,    _  _  /-><i  Responsibili- 

( Supreme  Court  of  Mass.: — Crocker  vs.  ties  involved 
Old   Colony  R.   R.   Co.   137  Mass.  417).  ' 
"When  a  transfer  of  stock  is  presented  to  a  stock 
corporation  it  is  bound  at  its  own  peril  to 
see  that  it  is  a  genuine  transfer  by  one  who 
has  power  of  disposition  over  the  stock ...  If 
it  issues  a  certificate  upon  a  forged  or  un- 
authorized transfer  the  real  owner  retains 
his  property  in  the  stock  and  the  corpora- 
tion may  be  liable  to  a  bona  fide  holder  of 
the  new  certificate." 

On  the  other  hand,  "If  a  proper  transfer 
is  presented  to  a  corporation,  it  is  its  duty  to 
issue  a  new  certificate  in  accordance  with  it, 
and  if  it  refuses  it  is  liable  to  the  person  to 
whom  the  transfer  is  made.'! 

Summing  up  the  responsibilities,  "For 
all  loss  occasioned  whether  by  fraud,  negli- 
gence or  unavoidable  mistake  by  it  or  its 
agents — in  the  transfer  of  its  stock,  such 
corporation  is  absolutely  liable,  and  no 
excuse  can  mitigate  its  liability/' 

Special  risks  are  involved  in  the  transfer 
of  stock  at  the  instance  of  executors,  ad- 
ministrators, trustees  or  guardians. 

(a)*  In  one  case  stock  held  in  trust  under 


*  Legal  decisions  also  a,  b,  c  and  d  quoted  from  Herrick's  "Organization, 
Growth  and  Management  of  Trust  Companies." 

E  41  : 


The  Fidelity  Trust  Company  of  Buffalo 


Transfer 
Agent 

Responsibili- 
ties Involved 
in  Transfer  of 
Corporate 
Stock 


a  Will  was  ordered  distributed  by  a  lower 
court  and  the  corporation  so  distributing  it 
was  afterwards  held  liable  by  the  Supreme 
Court  of  Tennessee  notwithstanding  the  in- 
structions of  the  lower  court,  on  the  ground 
that  the  distribution  was  not  in  accordance 
with  the  terms  of  the  Will,  of  which  the  cor- 
poration had,  or  ought  to  have  had  notice. 

(b)  Trustees  under  a  Will   transferred 
stock  in  excess  of  their  authority  and  used 
the  proceeds  for  their  own  benefit,  and  the 
corporation  permitting  the  transfer  of  its 
stock  was  held  chargeable  with  the  know- 
ledge of  the  contents  of  the  Will  which  was 
spread  on  the  public  records,  and  was  re- 
quired to  make  good  to  the  trust  estate  the 
value  of  the  stock. 

(c)  Executors  of  a  Will  transferred  stock 
to  themselves  as  trustees  and  afterwards  to 
a  successor  trustee,  the  latter  selling  the 
stock  and  using  the  proceeds  for  his  own 
purposes.     In  an  action  to  recover,   the 
Court  of  Appeals  of  Maryland  answered  the 
plea  of  the  defendant  corporation,  that  the 
mere  word  "Trustee"  gave  them  no  notice 
of  the  trust,  by  holding  that  having  been 
once  informed  of  the  Will  and  its  provisions 
affecting  the  stock  in  question,  that  know- 
ledge  continued,   and   the   company   was 

42 


"In  Witness  Whereof 


bound  to  see  that  the  trust  property  in  its  Transfer 
custody  was  protected  and  not  misappro- 


priated;  and  required  it  to  make  good  the 

,  in  Transfer  of 

1OSS.  Corporate 

(d)  In  another  case  a  transfer  on  the 
order  of  an  executor  caused  loss  to  a  cor- 
poration because  the  executor  had  not  com- 
plied with  the  law  of  the  testator's  domicile 
before  selling  the  stock  so  transferred.  If 
stock  is  transferred  to  a  trustee,  executor, 
administrator  or  guardian  in  an  investment 
of  trust  funds,  the  corporation  permitting 
such  transfer  of  its  stock  may  be  held  liable 
in  case  such  investment  of  trust  funds  is 
prohibited  by  law. 

Frequently  stock  may  be  sold  by  a  trustee 
who  holds  it  under  a  collateral  trust  agree- 
ment to  secure  an  issue  of  bonds.  It  then 
becomes  the  duty  of  the  transfer  agent  to 
examine  the  trust  agreement  and  ascertain 
whether  the  trustee  actually  has  authority 
to  dispose  of  the  stock  by  power  of  sale, 
exchange,  or  otherwise;  and  if  so  to  see  that 
all  formalities  have  been  properly  complied 
with  before  the  transfer  is  made. 

Stock  certificates  are  constantly  being 
raised  by  various  confidence  men.  Special 
cases  have  recently  come  to  our  notice 
where  certificates  of  small  amounts  have 

E   43   1 


The  Fidelity  Trust  Company  of  Buffalo 


Transfer 
Agent 

Responsibili- 
ties Involved 
in  Transfer  of 
Corporate 
Stock 


Transfer 
Agent 

Problems  in 
Connection 
with  Stock 
Transfers 


been  raised  by  men  who  were  artists  in 
penmanship.  The  sums  involved  were  so 
small  that  one  would  scarcely  credit  such  a 
job  to  men  as  clever  as  they.  We  were  able 
instantly  to  detect  the  fraud  by  comparing 
the  stock  certificates  with  our  records,  and 
the  manipulators  were  promptly  brought 
to  justice. 

PROBLEMS    THAT    MAY    CONFRONT    A 

CORPORATION  IN   THE   TRANSFER 

OF  ITS  STOCK 

(1)  An  individual  owning  stock  had  it 
registered  on  the  books  of  record  in  another 
name  promising  presently  to  send  in  the 
original  certificates.    He  never  made  de- 
livery of  the  certificate  representing  the 
shares  of  stock.  Later  he  sold  the  certificate 
of  stock  for  value  and  made  full  and  com- 
plete assignment  thereof  to  a  third  party. 
The  said  third  party  requested  transfer  of 
the  shares  into  his  name,  but  the  transfer 
agent  refused.  What  was  the  basis  of  the 
action?  By  what  procedure  could  the  third 
party  recover? 

(2)  An  individual  who  owned  stock  in  a 
corporation  lost  the  certificates.     He  re- 
quested that  new  ones  be  issued  to  him. 
Should  new  certificates  be  issued?    Would 

E  44  : 


"In  Witness  Whereof 


any  responsibility  attach  thereto?    What  Transfer 
papers  or  other  proofs  should  be  required  ^ 
under  the  circumstances? 

(3)  An  individual  lost  certain  stock  cer- 
tificates and  new  ones  had  been  issued 
to  him.  His  name  was  registered  on  the 
books  of  record  as  owner  of  the  shares. 
A  few  months  later  another  person  pre- 
sented the  stock  for  transfer.  The  "lost 
certificates'  had  been  endorsed  by  the 
original  owner.  He,  however,  claimed 
that  the  certificates  had  been  endorsed 
in  blank;  and  he  further  stated  that  he 
did  not  know  the  individual  who  pre- 
sented the  certificates  for  transfer.  The 
individual  who  presented  the  certificates 
claimed  that  they  were  purchased  from  the 
original  owner  for  value.  He  identified  him- 
self to  the  entire  satisfaction  of  the  officers 
of  the  corporation,  who  also  recognized  and 
identified  the  endorsement  as  the  signature 
of  the  original  owner.  Two  sets  of  certi- 
ficates were  at  that  time  outstanding  cover- 
ing the  same  stock.  Who  was  the  actual 
owner  of  the  stock  in  question?  Which 
claim  should  be  recognized?  If  the  evidence 
at  hand  was  insufficient  to  prove  actual 
ownership,  what  proceedings  should  be  fol- 
lowed in  order  to  establish  it? 

45  : 


The  Fidelity  Trust  Company  of  Buffalo 


Transfer 
Agent 

Problems  in 
Connection 
with  Stock 
Transfers 


(4)  An  individual  had  endorsed  certifi- 
cates in  blank  to  obtain  a  loan.   The  loan 
was  ultimately  paid  and  the  owner  of  the 
certificates  placed  them  in  his  safe.    His 
office  was  burglarized  and  among  other  items 
the  certificates  were  stolen.    An  innocent 
third  party  purchased  the  certificates  for 
full  value,  having  no  notice  that  they  had 
been  stolen.  He  presented  them  for  transfer 
into  his  name.    In  the  meantime  an  order 
from  the  original  owner  to  stop  transfer  had 
been  received  by  the  corporation.    When 
presented  by  the  third  party  transfer  was 
refused.    The  original  owner  did  not  deny 
his  endorsement  and  the  signature  of  the 
witness  was  satisfactorily  identified.    Was 
the  action  on  the  part  of  the  transfer  agent 
proper?  What  were  the  respective  rights  of 
the  two  parties  interested?   What  was  the 
proper  procedure  under  the  circumstances? 

(5)  Stock   certificates   standing   in    the 
name  of  an  individual  as  agent  were  pre- 
sented for  transfer  into  his  individual  name. 
There  was  no  question  as  to  the  identity  of 
the  signature  of  either  agent  or  witness. 
Should  such  a  transfer  be  permitted?  Would 
any  proofs  or  other  authority  be  required? 

(6)  Stock  certificates  were  stolen.    No 
stop  transfer  order  from  the  owner  had  been 

E  46  : 


11  In  Witness  Whereof 


received  by  the  corporation.   The  signature  Transfe 
of  the  owner  was  cleverly  forged,  and  the 

•*  °         '  Problems  in 

corporation  when  requested  to  do  so  made 
the  transfer.  Later  the  owner  demanded 
new  certificates.  His  name  did  not  then 
appear  on  the  books  of  record  as  the  owner 
of  the  shares.  What  were  the  respective 
rights  of  the  interested  parties?  Who 
should  properly  assume  the  loss  involved? 

(7)  A  certificate  is  issued  to  "John  or 
Mary    Smith."     Should    the    corporation 
permit  a  transfer  on  the  endorsement  of  one 
of  the  designated  owners?    Is  there  any 
difference  between  a  certificate  so  issued  and 
one  issued  to  "John  and  Mary  Smith?" 

(8)  Suppose  a  certificate  had  been  prop- 
erly endorsed  and  dated;  let  us  assume  that 
it  was  accompanied  by  a  detached  power  of 
attorney  which  bore  a  date  very  much  prior 
to  that  of  the  assignment  on  the  certificate. 
Should  the  individual  named  in  the  power 
of   attorney  be   permitted   to   make   the 
transfer  on  the  books  of  record?  Would  the 
assignment  be  valid? 

(9)  A  certificate  issued  in  the  name  of 
'H.  S.  Jones'   is  endorsed  in  the  name  of 

"  Harvey  S.  Jones."  Is  this  a  valid  endorse- 
ment? 

(10)  A  certificate  was  issued  in  the  name 

E   47   ] 


The  Fidelity  Trust  Company  of  Buffalo 


Transfer 
Agent 

Problems  in 
Connection 
with  Stock 
Transfers 


of  John  Welch.  This  name  was  erased,  and 
that  of  Thomas  Jergens  substituted.  Would 
a  certificate  of  such  appearance  be  accept- 
able if  the  endorsement  and  assignment  by 
Thomas  Jergens  were  in  every  way  regular? 

(11)  An  executor  has  certain  stock  certi- 
ficates endorsed  to  himself  individually  and 
requests  transfer  of  stock  into  his  name.   Is 
the  transfer  in  order?   What  proofs,  if  any, 
should  be  required? 

(12)  At  a  private  sale  of  securities  an 
executor  purchased  stock  belonging  to  the 
estate  and  asked  that  the  certificates  be 
transferred  to  his  name.   Is  such  a  transfer 
in  order?    Is  there  any  difference  between 
the  title  of  stock  so  secured  by  an  executor 
of  an  estate  and  that  obtained  at  a  public 
sale  of  such  securities?    Are  any  proofs 
necessary  in  either  instance? 

(13)  An  individual  died  leaving  as  part  of 
his  estate  shares  of  stock  in  a  certain  cor- 
poration which  consisted  of  the  consolida- 
tion of  several  corporations  some  of  which 
were  organized  under  the  laws  of  several 
different  States.   The  administrator  of  the 
estate  sold  the  stock  to  convert  it  into  cash 
in  order  to  make  final  distribution.   Would 
a  waiver  from  the  comptroller  of  the  State 
of  the  decedent's  residence  be  sufficient,  or 

n  48  : 


"In  Witness  Whereof 


would  waivers  be  required  from  the  several  Tr 
States  involved  before  making  the  transfer 

0  Problems  in 

of  the  stock  in  question?  What  other  proofs 
would  be  necessary  before  effecting  a  trans- 
fer of  stock  under  such  circumstances? 

(14)  A  trustee  received  as  part  of  a  trust 
estate  stock  which  was  not  legal  for  trust 
investments.     The  stock  was  specifically 
bequeathed    to    remaindermen    after    the 
death  of  the  life  tenant.  By  the  terms  of  the 
Will  the  trustee  was  required  to  invest  in 
legal  securities.   The  trustee  sold  the  stock 
and  the  purchaser  asked  that  the  stock  be 
transferred  to  his  name.    The  corporation 
refused  to  make  the  transfer.  Was  its  stand 
well  taken?    What  was  the  basis  of  its 
action? 

(15)  A  trustee  purchased  from  the  trust 
estate  for  his  own  account  stock  consider- 
ably under  its  market  value.   The  corpora- 
tion was  entirely  familiar  with  the  entire 
proceeding.  Should  it  have  made  a  transfer 
of  the  stock  into  his  individual  name  when 
requested  by  him  to  do  so? 


The  foregoing  problems  are  fair  examples 
of  the  more  common  circumstances  that 


49 


The  Fidelity  Trust  Company  of  Buffalo 

arise  in  connection  with  the  transfer  of 
holders'  stock.  Of  course  there  will  be  situations  of 
Must^e  a  more  complex  nature  that  require  special 
study  and  attention,  but  in  each  case  the 
corporation  concerned  is  bound  to  see  that 
the  actual  owners'  rights  are  recognized  and 
properly  protected.  It  is,  therefore,  easy  to 
realize  that  the  transfer  of  corporate  stock 
requires  a  thorough  knowledge  of  corpora- 
tion laws  in  the  several  States,  constant 
study,  and  attention  to  new  regulations  in 
connection  with  corporation,  income  and 
inheritance  tax  laws,  both  Federal  and 
State.  Furthermore  a  careful  examination 
and  scrutiny  of  every  certificate  presented 
is  necessary  in  order  to  detect  any  element 
that  might  prejudice  stockholders'  rights  or 
interests. 

Can  an  officer  of  the  average  corporation 
afford  to  devote  sufficient  time  and  study 
to  this  particular  class  of  work  regardless 
of  whether  or  not  the  number  of  transfers 
be  large  or  small?  Could  his  time  not  be 
employed  with  greater  profit  to  the  corpora- 
tion if  his  efforts  were  directed  in  different 
channels? 

The  trust  company  which  specializes  in 
corporate  work  of  this  character  has  equip- 
ment far  superior  to  that  of  any  corporation 

E    50   H 


"In  Witness  Whereof 


which   attempts  to   handle   this   business  stock- 
itself.  holders' 

The  responsibilities  assumed  by  corpora-  Must  Be 
tions  in  the  transfer  of  stock  apply  also  to  Protected 
the  transfer  of  voting  trust  certificates, 
trustee  certificates,  registered  bonds  and 
certificates  of  deposit. 


E  51 


REGISTRAR 


REGISTRAR 

A  FEW  years  ago,  speculation  seemed  the  Registrar 
order  of  the  day  in  some  railroad  and 
industrial  corporations.  The  authorized 
capital  stock  was  in  some  instances  over- 
issued, with  consequent  losses  to  innocent 
purchasers  who  bought  the  unauthorized 
shares  of  stock. 

To  prevent  a  repetition  of  such  fraud,  the 
corporate  registrar  was  established.  Where 
a  transfer  agent  and  a  registrar  are  used  in 
connection  with  the  transfer  of  capital 
stock,  the  certificate  is  not  valid  unless  it 
is  countersigned  by  the  registrar.  When 
presented  to  the  registrar  for  its  counter- 
signature,  the  certificate  is  carefully  scruti- 
nized to  see  that  the  certificate  is  genuine. 
This,  of  course,  contemplates  an  exami- 
nation of  the  signatures  of  the  president, 
secretary  and  transfer  agent  to  be  sure  that 
none  have  been  forged.  If  the  certificate  is 
of  an  original  issue  it  is  registered  when 
countersigned  by  the  registrar. 

When  the  entire  authorized  capital  stock 
has  been  issued  and  a  certificate  is  presented 
by  the  transfer  agent  to  be  recorded  in 
another  name,  the  registrar  investigates  its 

E    55    3 


The  Fidelity  Trust  Company  of  Buffalo 

Registrar  records  to  ascertain  whether  the  cancelled 
certificate  is  the  same  as  that  which  was 
originally  issued,  and  examines  the  signa- 
tures of  the  corporate  officers  and  that  of 
the  transfer  agent,  as  well  as  the  seal  of  the 
company,  with  a  view  to  detecting  any 
irregularities.  If  the  number  of  shares  in 
the  new  certificate,  or  certificates,  checks 
up  properly  with  the  cancelled  certificate, 
and  if  the  transfer  appears  to  be  genuine  in 
every  respect,  the  name  of  the  new  owner  of 
the  transferred  shares  is  registered  in  the 
books  of  record.  The  registrar  then  cancels 
the  old  certificates  and  affixes  its  signature 
to  the  new  ones,  thereby  making  the  trans- 
fer complete. 

In  certifying  that  the  certificate  is  genuine 
and  that  it  is  one  of  the  duly  authorized 
issue  the  registrar  safeguards  not  only  the 
interests  of  the  corporation  but  those  of  the 
owner  and  the  prospective  purchaser  of 
stock  as  well. 

The  public  is  beginning  to  realize  the 
value  of  countersignatures  of  a  transfer 
agent  and  a  registrar,  and  usually  looks  for 
them  on  a  certificate  that  is  purchased.  If 
neither  signature  appears  some  individuals 
are  inclined  to  doubt  the  standing  of  the  cor- 
poration. For  this  reason  the  trust  company, 

E  56  : 


"In  Witness  Whereof 


which  values  its  reputation,  makes  a  very  Registrar 
careful  investigation  of  the  corporation 
seeking  its  service  as  registrar  or  transfer 
agent.  This  is  done  in  order  to  ascertain 
whether  the  corporation  is  one  organized  to 
engage  seriously  and  actively  in  the  business 
as  set  forth  in  its  articles  of  incorporation, 
and  whether  the  officers  are  reliable  business 
men  of  good  standing. 

Corporations  contemplating  an  issue  of 
capital  stock  of  any  nature  will  do  well  to 
investigate  and  weigh  the  advantages  to  be 
gained  by  having  a  trust  company  act  as 
registrar  for  their  corporate  stock. 


E   57   ] 


FISCAL  AGENT 

UNDER   MUNICIPAL 

BOND  ISSUE 


FISCAL  AGENT  UNDER  MUNICIPAL 

BOND  ISSUE 

IN  investment  circles  a  secured  obligation  Fiscal 
is  ordinarily  known  as  a  bond.   It  is,  in  ^ent 
other  words,  an  interest-bearing  obligation  Municipal 
issued  by  a  government,  municipality  or  Bond 
corporation,  in  which  there  is  a  promise  to 
pay  a  fixed  amount  to  the  holder  at  a  speci- 
fied time. 

The  most  important  consideration  in  an 
issue  of  municipal  bonds  is  that  of  validity. 
Unlike  an  issue  of  industrial  bonds,  there  is 
ordinarily  no  question  as  to  the  value  of 
assets  that  may  be  levied  upon.  It  is  a 
question  as  to  how  those  assets  may  be  made 
available,  to  which,  of  course,  the  answer  is 
taxation.  To  protect  municipalities  from 
the  dangers  that  beset  unrestricted  taxa- 
tion, unrestrained  contraction  of  debts,  etc., 
various  State  legislatures  have  passed  stat- 
utes establishing  certain  tax  and  debt  limits 
upon  municipalities,  districts,  and  quasi 
corporations  of  a  public  nature.  Therefore 
bonds  issued  by  a  municipality  in  violation 
of  statutory  limitation  may  later  be  repudi- 
ated. 

Usually    municipal    bonds    have    been 

[   61    ] 


The  Fidelity  Trust  Company  of  Buffalo 


Fiscal 
Agent 
Under 
Municipal 
Bond  Issue 


invalidated  in  the  past  for  one  of  the  follow- 
ing reasons,  (1)  defects  in  authority  of  issue, 
(2)  purpose  of  issue,  (3)  process  of  issue, 
(4)  violation  of  debt  and  tax  restrictions. 

Authority  to  issue  municipal  bonds  may 
be  said  to  rest  in  constitutions  or  statutes. 
Approval  by  a  majority  vote  of  the  tax 
payers  affected  is  frequently  required.  Of 
course  it  is  sometimes  possible  to  validate 
an  issue  of  bonds  by  special  legislation 
where  no  authority  appears  to  exist.  There- 
fore it  is  necessary  to  study  statutes,  con- 
stitutions or  other  special  legislation  in 
order  to  detect  any  element  that  may  affect 
the  authority  of  the  issue. 

Having  been  satisfied  that  the  authority 
exists  it  is  then  important  to  investigate  the 
process  by  which  such  authority  may  be 
translated  into  the  actual  issue.  If  a  popular 
vote  is  required,  has  every  requirement  of 
the  election  been  observed?  Has  there  been 
any  irregularity  in  connection  with  the 
advertisement  for  bids?  Does  the  rate  of 
interest  offered  exceed  the  limit  permitted 
by  statute?  Have  the  rate  of  interest  and 
maturity  date  been  specified  in  the  adver- 
tisement? These  and  many  similar  ques- 
tions arise  in  connection  with  the  process  of 
issue. 

r  62  : 


"In  Witness  Whereof1 


What  is  the  purpose  of  the  issue?  Munic-  Fiscal 
ipalities  may  contract  obligations  for  pub-  Agent 
lie  purposes,  not  private.    It  is  quite  usual  Muidcipai 
to  see  an  issue  of  municipal  bonds  having  for  Bond  is 
its  purpose  the  construction  or  extension  of 
sewers,  streets,  bridges,  waterworks,  school 
buildings,  municipal  buildings  and  public 
works  generally.    Of  course  bonds  are  also 
issued  for  many  public  purposes  other  than 
those  mentioned  above,  and  for  such  issues 
validity  from  the  standpoint  of  purpose  is 
of  special  importance. 

Some  of  our  States  have  very  specific 
statutes  on  the  subject  of  debt  restrictions. 
Quoting  Chamberlain,  "the  Constitution  of 

Indiana  says,  all  bonds  or  obligations  in 
excess  of  such  amount  (permitted  by  law, 

namely,  two  per  cent  of  the  assessment) 
shall  be  void/'  Many  other  States  have 
similar  statutes  limiting  obligations  that 
may  be  contracted  by  municipalities  to  a 
certain  percentage  of  the  assessed  property 
valuation  subject  to  tax. 

When  irregularities  of  the  nature  above 
recited  occur,  it  is  the  duty  of  municipalities 
to  invalidate  such  obligations  in  obedience 
to  statutory  requirements. 

The  opinion  of  the  bond  attorney  is, 
therefore,  of  paramount  importance  to  the 


The  Fidelity  Trust  Company  of  Buffalo 


Fiscal 
Agent 
Under 
Municipal 
Bond  Issue 


bondholder,  since  obviously  his  security  in 
a  municipal  bond  depends  upon  the  validity 
of  the  issue.  The  bond  attorney  likewise 
performs  a  service  for  the  tax  payer,  be- 
cause his  thorough  search  may  prevent  a 
levy  of  taxes  to  meet  interest  or  principal 
payments  on  an  invalid  issue  of  bonds. 

Assuming  that  all  legal  requirements 
precedent  to  the  issue  have  been  met  it  is 
necessary  to  see  that  the  bond  itself  is  legal 
in  every  way,  i.  e.,  that  the  seal  is  affixed, 
that  it  is  signed  by  the  mayor,  treasurer, 
city  clerk,  supervisor,  or  other  proper 
officials,  etc.  Care  must  also  be  taken  to 
prevent  counterfeiting,  overissue  and  pos- 
sible fraud  in  connection  with  the  bonds. 

The  following  quotation  has  been  taken 
from  Chamberlain's  excellent  treatise, "  Prin- 
ciples of  Bond  Investment". 

"  Invalidity  as  affected  by  the  authority, 
purpose  or  process  of  issue,  or  by  the  viola- 
tion of  debt  or  tax  restrictions,  is  almost 
always  accidental.  There  is  seldom  any 
deliberate  irregularity  on  the  part  of  the 
municipality,  except  in  the  petty  matter  of 
awarding  loans.  Criminality  on  the  part  of 
outsiders,  however,  is  by  no  means  obsolete. 
In  recent  years  the  forgery  and  successful 
hypothecation  of  municipal  bonds  by  two 

i  64  : 


"In  Witness  Whereof 


men,  alone,  has  amounted  to  $1,600,000.00.  Fiscal 
Therefore,  to  safeguard  the  community  and 
the  investor  against  forgery  and  overissue  Municipal 
there  has  arisen  in  the  past  decade  the  cus-  Bond  is 
torn  of  placing  the  supervision  of  new 
municipal  issues  in  the  hands  of  trust 
companies.  Following  the  regulations  of 
the  leading  stock  exchanges  the  trust  com- 
panies furnish  steel  engraving  of  highest 
quality  and  sometimes  special  paper.  Upon 
each  bond  is  placed  their  countersignature. 
Often  before  the  issue  is  offered  to  bankers 
or  the  public,  bond  attorneys  acting  for  the 
trust  company  pass  upon  its  legality.  In 
these  ways  every  precaution  is  taken  against 
invalidity,  and  possible  loss  except  through 
municipal  bankruptcy  is  reduced  to  a  mini- 
mum." 

Since  the  administration  of  a  municipality 
is  subject  to  frequent  change,  and  also  due 
to  the  fact  that  many  office  holders  are 
unfamiliar  with  modern  financial  methods 
and  requirements,  the  municipality  selects 
a  trust  company  to  act  as  its  disbursing  or 
fiscal  agent  in  the  payment  of  interest  on 
bonds  and  to  redeem  the  issue  at  maturity. 
This  relieves  the  administration  of  con- 
siderable detail  and  at  the  same  time  assures 
bondholders  that  their  interests  will  receive 

E  65  3 


Fiscal 
Agent 
Under 
Municipal 
Bond  Issue 


The  Fidelity  Trust  Company  of  Buffalo 

prompt  attention  at  all  times.  The  trust 
company  will  also  act  as  registrar  for  those 
holders  who  desire  bonds  registered  in  their 
individual  names.  The  broad  experience  of 
a  trust  company  enables  it  to  make  prompt 
decisions  as  to  the  proper  procedure  in  con- 
nection with  the  transfer  of  title  to  regis- 
tered bonds. 


E   66   1 


TRUSTEE 

UNDER   CORPORATE 
BOND  ISSUE 


TRUSTEE  UNDER  CORPORATE 
BOND  ISSUE 

BANKS  prefer  loans  of  a  self  liquidating  Trustee 
character,  i.  e.,  loans  whose   date   of 

•i     •    -i  j?  •.          11-1 
maturity  is  definite,  and  which  are  more  or  Bond  Issue 

less  of  short  duration.  By  this  means,  the 
bank's  resources  are  kept  in  a  liquid  con- 
dition to  meet  any  sudden  or  unusual  de- 
mands by  its  depositors. 

Short  term  loans  are  usually  made  to 
finance  commercial  transactions,  being  paid 
by  the  corporation  when  collection  is  made 
from  its  customer. 

A  corporation  may  contemplate  an  ex- 
pansion of  its  manufacturing  or  warehouse 
facilities.  Unless  the  necessary  capital  has 
been  accumulated,  the  corporation  may  re- 
quire a  loan  to  finance  the  project.  Obvi- 
ously a  loan  of  short  duration  under  these 
circumstances  would  work  a  hardship  on 
the  corporation  unless  there  was  in  immedi- 
ate prospect  some  unusually  large  return 
whereby  the  note  could  be  met  at  maturity. 
The  ideal  loan  from  the  corporation's  stand- 
point would  be  one  whereby  the  obligation 
matured  at  some  future  date,  say  five  or  ten 
years,  or  even  more  remotely  if  the  amount 

E  69  : 


The  Fidelity  Trust  Company  of  Buffalo 


Trustee 
Under 
Corporate 
Bond  Issue 


involved  was  considerable.  This  would 
allow  the  corporation  to  set  aside  annually 
from  its  profits  a  certain  sum  with  which  to 
liquidate  the  obligation  when  due  or  to 
make  arrangements  for  its  refunding,  and 
at  the  same  time  would  in  no  way  impair 
the  working  capital  of  the  corporation. 
Such  financing  would  be  considered  an  in- 
vestment loan.  Therefore  the  corporation 
would  naturally  seek  an  individual  or  insti- 
tution having  surplus  funds  for  long  term 
investment. 

When  a  loan  is  made  the  security  will  be 
lodged  with  the  individual  or  institution  ad- 
vancing the  funds.  If,  however,  the  amount 
desired  is  of  considerable  magnitude,  it 
might  be  utterly  impossible  to  obtain  a 
loan  from  any  one  individual  or  institution. 
It  might  become  necessary  to  appeal  to 
hundreds  or  even  thousands  of  investors, 
and  to  meet  the  various  circumstances 
of  each,  the  loan  might  be  separated  into 
units  or  denominations  of  five  hundred  and 
one  thousand  dollars  each.  Naturally  each 
investor  will  want  security  for  his  in- 
dividual loan  or  investment.  If  thousands 
of  investors  were  required  to  supply  the 
necessary  funds,  and  security  in  the  form 
of  a  mortgage  were  offered,  it  is  evident 

n  70  i 


"In  Witness  Whereof 


that  the  property  could  not  be  divided  into  Tmste 
thousands  of  units  and  a  separate  mortgage  ^nder 
issued  to  each  investor.   The  cost  would  be  Bond  issue 
prohibitive  and  the  scheme  physically  im- 
possible, since  one  of  the  mortgaged  units 
alone  would  be  of  little  value,  if  detached 
from  the  property  as  a  whole. 

To  meet  such  a  situation  one  mortgage 
covering  the  entire  property  is  given  to  a 
trustee  who  represents  the  interests  of  all 
concerned.  Such  an  indenture  is  ordinarily 
known  as  a  Mortgage  Deed  of  Trust. 

It  is  said  that  corporation  bonds  secured 
by  Mortgage  Deeds  of  Trust  came  into 
being  with  the  advent  of  steam  railroads 
nearly  a  century  ago. 

Deeds  of  Trust  are  very  similar  in  nature 
and  in  general  may  be  said  to  be  constructed 
in  substantially  the  following  manner:  fee 
or  title  to  the  property  is  vested  in  the 
trustee;  grantor  retains  possession  thereof 
until  default;  grantor  through  its  fiscal 
agent  pays  coupons  when  due;  grantor 
agrees  to  retire  a  certain  number  of  bonds 
annually  or  build  up  sinking  fund  to  retire 
issue  at  maturity;  upon  substitution  of 
satisfactory  property  trustee  may  release 
a  portion  of  mortgaged  property  for  sale  by 
grantor;  grantor  must  pay  all  taxes  and 

n  71  n 


The  Fidelity  Trust  Company  of  Buffalo 


Trustee 
corporate 


liens,  as  well  as  keep  property  in  repair; 
grantor  must  keep  property  properly  in- 

, ,  ,  ,        • 

sured;  grantor  may  agree  to  pay  a  certain 
percentage  of  normal  income  taxes;  princi- 
pal may  be  declared  due  upon  default  in 
interest  either  upon  initiative  of  trustee  or 
by  certain  proportion  of  bondholders;  defi- 
nition of  duties  and  responsibilities  of 
trustee;  provision  for  appointment  of  new 
trustee  in  event  of  removal  or  resignation 
of  trustee  named  in  the  indenture;  certi- 
fication of  bonds,  registration  of  bonds; 
compensation  of  trustee. 

The  above  is  the  frame  ordinarily  used  in 
a  Deed  of  Trust,  however,  various  issues 
proposed  will  naturally  be  attended  by 
circumstances  peculiar  to  each  and  special 
consideration  will  be  required. 

When  a  Mortgage  Deed  of  Trust  has  been 
accepted,  a  "  trust'  in  fact  and  in  law  as 
well  as  in  name  is  created  for  the  protection 
of  bondholders.  It  is  highly  important, 
therefore,  to  select  a  responsible,  reliable 
and  thoroughly  competent  trustee  to  dis- 
charge the  duties  outlined  in  the  indenture. 

Many  years  ago  it  was  the  usual  prac- 
tice to  name  individuals  as  trustees  to  pro- 
tect the  interests  of  investors.  Individuals 
acting  in  such  capacities  were,  however, 

E    72    ] 


"In  Witness  Whereof 


subject  to  the  frailties  and  uncertainties  of 
human  existence.  Since  the  development  of  Under 
trust  companies  with  their  obvious  advan- 
tages over  individuals  in  such  capacity, 
this  business  has  been  entrusted  to  them. 
Because  of  the  peculiar  nature  and  special 
conditions  involved,  the  appointment  as 
trustee  under  a  bond  issue  is  one  of  the 
most  important  that  a  trust  company  can 
accept. 

The  corporation  mortgage  is  explicit  in 
its  terms  and  usually  limits  the  liability  of 
the  trustee  to  the  exercise  of  good  faith  and 
due  diligence.  However,  no  trust  company 
can  afford  to  lend  its  reputation  and  en- 
dorsement to  a  transaction  of  this  nature  by 
becoming  a  trustee  if  there  is  any  question 
concerning  the  regularity  of  the  transaction 
or  the  good  faith  of  all  parties  concerned. 

Bonds  in  the  form  specified  in  the  trust 
indenture  are  usually  engraved.  It  fre- 
quently becomes  necessary  to  issue  interim 
or  temporary  certificates  because  of  delay 
occasioned  in  the  engraving  of  definitive  or 
permanent  bonds.  On  such  occasions  the 
interim  certificates  must  be  cancelled  and 
permanent  ones  issued.  Before  the  defini- 
tive bonds  are  issued  or  delivered,  each  is 
sealed  and  attested  by  the  officers  of  the 

L  73  : 


The  Fidelity  Trust  Company  of  Buffalo 


Trustee 
Under 
Corporate 
Bond  Issue 


corporation  who  deliver  them  to  the  trust 
company.  The  trustee  then  proceeds  to 
examine  each  as  to  its  phraseology,  form, 
etc.  If  correct  in  every  way,  the  trustee 
certifies  each  bond  substantially  as  follows: 
"It  is  hereby  certified  that  this  bond  is 
one  of  the  series  mentioned  in  the  Trust 
Agreement  referred  to  within. 


Dated. 


.Buffalo,  N.  Y. 


By. 


.Trust  Company,  Trustee. 
Secretary. ' 


When  certified  the  trustee  makes  de- 
livery of  the  bonds  in  accordance  with  the 
terms  of  the  Trust  Agreement. 

In  the  payment  of  coupons  great  care 
must  be  taken  to  see  that  cancelled  coupons 
are  properly  filed.  It  is  also  essential  to 
exercise  caution  to  prevent  the  payment  of 
coupons  detached  from  such  bonds  as  may 
have  been  called  for  redemption.  It  some- 
times happens  that  calls  are  advertised  in 
one  or  two  obscure  newspapers  and  the 
holder  may  never  see  the  notice.  Trust 
companies  have  been  able  to  relieve  cor- 
porations of  a  great  amount  of  detail  by 
acting  as  the  corporation's  paying  or  dis- 
bursing agent.  This  subject  is  more  fully 
discussed  in  another  chapter. 

E  74  3 


"In  Witness  Whereof 


Retirement  of  bonds  is  provided  for  in 
various  ways.  They  may  be  redeemed  or 

n    j         i     11  •  i.  •  ^   J    +        Corporate 

called,  wholly  or  in  part,  on  interest  dates  Bond  issue 
by  drawn  numbers,  at  par  or  at  a  premium. 
By  the  terms  of  a  mortgage  a  sinking  fund 
may  be  required  whereby  the  corporation 
deposits  a  certain  sum  at  stated  periods 
with  the  trustee.  A  sinking  fund  may  be 
used  to  retire  the  bonds  gradually  or  to 
meet  the  obligation  in  full  at  maturity. 
This  may  be  accomplished  either  by  re- 
demption or  by  purchase  in  the  open 
market. 

When  bonds  are  redeemed  prior  to  ma- 
turity they  may  be  filed  away  until  the 
issue  becomes  due.  At  maturity  the  mort- 
gage is  cancelled  by  the  trustee  upon  the 
payment  of  principal  and  interest  by  the 
corporation,  and  the  bonds  are  then  can- 
celled and  burned.  After  the  bonds  have 
been  destroyed  a  cremation  certificate  is 
issued  by  the  trustee,  and  the  transaction 
is  closed. 

The  above  discussion  suggests  in  a  gen- 
eral way  the  many  duties  that  may  be 
performed  by  a  trust  company  when  acting 
as  trustee  under  an  issue  of  corporate  bonds. 
Under  separate  headings  on  the  following 
pages  an  effort  has  been  made  to  sketch 

n  75  : 


The  Fidelity  Trust  Company  of  Buffalo 


briefly  some  of  the  more  distinct  types  of 
bonds  issued  by  corporations. 

CORPORATION  BONDS  SECURED  BY 
MORTGAGES  ON  REAL  PROPERTY 

Trustee  When  it  is  proposed  to  issue  bonds  se- 

cured  by  a  mortgage  on  real  property,  the 
consent  of  a  majority  of  directors  and  of 
holders  of  two-thirds  of  the  stock  must  be 
obtained  to  make  the  mortgage  valid.  Con- 
sent of  the  stockholders  may  be  either  in 
writing  or  by  vote  at  a  special  meeting 
called  for  that  purpose  upon  the  same  con- 
ditions of  notice  as  that  required  for  the 
annual  meeting  of  stockholders.  A  certifi- 
cate under  seal  by  the  corporation,  signed 
by  the  president  or  vice-president  and  the 
secretary  or  assistant  secretary,  must  be 
filed  and  recorded  in  the  office  of  the  clerk 
of  the  county  wherein  the  corporation  has 
its  principal  office.  The  certificate  will  set 
forth  the  fact  that  such  consent  either  in 
writing  or  by  vote  of  two-thirds  of  the  stock- 
holders has  been  obtained. 

So  long  as  the  corporation  complies  with 
the  terms  of  the  mortgage,  it  is  permitted  to 
retain  physical  control  of  the  property 
covered  by  the  mortgage.  If,  however, 
there  should  be  any  default  in  the  interest, 

E    76    3 


"In  Witness  Whereof 


Mortgage 
Bonds 


principal   or  both,  the  trustee  may  take  Trustee 
steps  to  safeguard  the  interests  of  all  con- 
cerned. This  may  require  foreclosure  of  the 
mortgage  and  sale  of  the  property. 

Under  the  terms  of  a  mortgage  the 
authority,  duties  and  rights  of  the  trustee 
are  defined  and  clearly  set  forth.  These,  of 
course,  must  be  observed  and  faithfully 
discharged.  The  mortgage  will  also  describe 
the  real  estate  concerned  and  give  all  par- 
ticulars regarding  the  property. 

While  the  trustee  is  usually  relieved  from 
liability  except  in  the  case  of  gross  negligence 
or  willful  malfeasance,  yet  the  trust  com- 
pany, before  accepting  a  corporate  mortgage 
trust,  carefully  investigates  all  essential  fea- 
tures of  the  transaction.  Counsel  will  be 
sought  to  verify  the  legality  of  the  mortgage. 
An  inquiry  is  usually  made  to  ascertain 
whether  the  documents  are  in  proper  form, 
whether  the  purpose  is  lawful,  and  whether 
all  requirements  of  the  State  in  which  the 
property  is  located  have  been  complied  with. 

When  preliminary  investigations  have 
been  completed  the  mortgage  may  be  exe- 
cuted and  the  acceptance  of  the  trust  may 
be  formally  made  by  the  trustee,  after 
which  the  mortgage  is  recorded  in  the 
county  wherein  the  property  is  located. 

E    77   : 


The  Fidelity  Trust  Company  of  Buffalo 


Trustee 

Mortgage 
Bonds 


Trustee 

Equipment 
Trust  Bonds 


Frequently  the  delivery  of  bonds  is  con- 
tingent upon  specific  conditions  to  be  ful- 
filled by  the  corporation.  It  may  be  stipu- 
lated that  the  entire  issue  is  to  be  certified 
and  delivered  by  the  trustee  as  soon  as  the 
mortgage  is  recorded;  or  a  proportion  may 
be  delivered  subject  to  the  completion  of 
certain  construction  work  on  the  mortgaged 
property.  A  general  and  refunding  mort- 
gage may  be  issued  whereby  provision  is 
made  for  the  retirement  of  an  underlying 
issue  when  it  matures.  Under  the  terms  of 
the  mortgage  it  is  frequently  stipulated  that 
property  acquired  subsequent  to  the  de- 
livery of  bonds  shall  be  subject  to  the  lien  of 
the  mortgage;  or  it  may  be  provided  that 
property  subject  to  the  mortgage  may  be 
released  and  other  security  substituted. 

EQUIPMENT  TRUST  BONDS 

It  has  been  said  that  the  general  idea  of 
car  trusts  was  suggested  by  conditional 
sales  of  boats  to  freight  operators  or  con- 
tractors in  about  the  year  1830. 

Nearly  forty  years  later  certain  railroads 
having  already  issued  bonds  secured  by 
mortgages  on  their  property  were  con- 
fronted with  the  necessity  of  purchasing 
new  rolling  stock,  not  only  for  replacement 

n  78  : 


"In  Witness  Whereof 


but  also  to  meet  the  requirements  of  in-  Trustee 
creasing  traffic.  Many  issues  of  bonds  con- 
tained  "after  acquired  property"  clauses 
by  virtue  of  which  all  property  acquired 
subsequent  to  the  execution  of  the  mortgage 
became  subject  to  the  lien  thereof. 

Not  being  in  a  position  to  pay  cash  for 
the  new  equipment,  the  railroad  was  in  a 
dilemma.  Manufacturers  of  equipment 
would  not  sell  property  which  became  sub- 
ject to  a  lien  immediately  upon  delivery  to 
the  railroad  company,  except  for  cash.  Con- 
flicting judicial  opinions  were  expressed 
concerning  the  legality  of  conditional  sales 
in  various  States.  Some  held  that  "after 
acquired"  clauses  in  mortgages  subjected 
to  the  lien  thereof  only  the  equity  which 
railroads  actually  possessed  in  the  equip- 
ment. Others  held  that  rolling  stock  is 
movable  and,  therefore,  personal  property; 
that  possession  presumed  ownership;  hence 
such  property  became  subject  to  "after 
acquired"  clauses  of  said  mortgages  unless 
the  same  be  covered  by  a  chattel  mortgage 
properly  recorded. 

Rolling  stock  is  moved  from  one  State  to 
another,  and  therefore  security  in  the  form 
of  a  chattel  mortgage  would  be  impracti- 
cable because  of  the  expense  involved  by 

E  79  : 


The  Fidelity  Trust  Company  of  Buffalo 


Trustee        manifold  registrations.   At  that  early  date 
conditional  sales  did  not  seem  to  offer  a 

Trust  Bonds 

convenient  means  of  protection,  therefore 
manufacturers  could  not  adopt  the  policy 
followed  by  certain  boat  makers  above 
referred  to. 

Contracts  of  lease,  however,  were  recog- 
nized by  numerous  States,  so  manufacturers 
of  railroad  equipment  turned  to  this  device 
as  a  more  practicable  solution  of  the  prob- 
lem. This  was  the  inception  of  car  trusts. 

At  first  there  were  formed,  separate  and 
distinct  from  the  railroad  company,  asso- 
ciations which  purchased  and  owned  rolling 
stock.  Such  associations  leased  the  equip- 
ment to  railroad  companies  which  in  addi- 
tion to  paying  an  annual  rental  assumed  the 
expense  and  responsibility  of  insurance, 
taxes,  upkeep,  etc.  The  amount  received 
as  rent  was  such  that  the  price  of  equipment 
plus  a  fair  income  return  on  the  investment 
was  returned  to  the  leasing  association 
within  a  definite  period,  say  ten  years  or 
less,  after  which  title  was  passed  to  the 
railroad  company.  Investors  who  partici- 
pated in  these  associations  became  share- 
holders in  the  association.  The  capital  of 
such  leasing  companies  did  not  exceed  the 
cost  of  equipment  under  contract. 

E  so  : 


"In  Witness  Whereof" 


Philadelphia  was  foremost  in  the  forma-  Truste 
tion  of  these  associations  and  in  the  issue  of 
car  trust  bonds;  therefore  the  lease  prin- 
ciple has  become  popularly  known  as  the 
"Philadelphia  Plan."  Car  trust  certifi- 
cates differ  somewhat  from  car  trust 
bonds,  in  that  the  former  are  shares  in  a 
leasing  corporation,  while  the  latter  are 
direct  obligations  of  the  issuing  corporation 
or  association,  secured  by  the  deposit  of  a 
contract  of  lease  which,  of  course,  is  held 
by  a  trustee. 

Section  61  of  the  Personal  Property  Laws 
of  New  York  provides  that  a  contract  of 
conditional  sale  or  a  lease  of  locomotives  or 
rolling  stock  shall  be  valid  as  against  third 
parties  if  the  contract  or  lease  be  recorded 
in  the  county  within  which  is  located  the 
principal  office  of  the  vendee  or  lessee,  and 
if  the  locomotive  or  rolling  stock  bears  a 
plate  on  each  side  thereof,  indicating  that 
the  vendor  or  lessor  retains  ownership  of 
the  property. 

A  considerable  proportion  of  the  various 
States  have  enacted  similar  statutes  thereby 
greatly  simplifying  the  issue  of  equipment 
bonds  under  the  conditional  sale  plan. 

In  an  issue  of  this  nature  the  contract  is 
usually  assigned  to  a  trustee  who  holds 

:  si  : 


The  Fidelity  Trust  Company  of  Buffalo 

Trustee        title  to  the  equipment  until  all  payments 

T^ust  Bonds     have  been  made,  whereupon  title  is  passed 

by  delivery  of  a  bill  of  sale  to  the  vendee. 

Equipment    bonds    may   be    issued    to 

finance  the  purchase  of  steam  and  electric 

locomotives;  box,  coal  and  tank  cars;  street 

and  interurban  cars,  etc. 

Trust  indentures  specify  in  detail  the 
conditions  to  be  observed  by  all  parties 
thereto,  the  following  being  some  of  the 
provisions  usually  recognized;  names  of 
all  parties  to  the  trust  (the  vendor,  vendee 
and  the  trust  company);  terms  of  sale  or 
lease;  assignment  of  lease  to  trustee;  pro- 
vision for  replacement  of  equipment  lost, 
worn  out  or  destroyed,  and  a  report  on 
condition  of  equipment  at  least  annually; 
passing  of  title  to  vendee  upon  fulfillment 
of  contract  of  lease  by  bill  of  sale;  copy 
of  bonds  and  coupons  to  be  issued;  terms 
and  conditions  of  certification  by  trustee; 
provisions  for  issue  of  interim  certificates 
if  necessary;  application  of  rental  pay- 
ments toward  satisfaction  of  dividend  war- 
rants or  interest  coupons  and  retirement  of 
bonds;  specifications  as  to  payment  of 
taxes,  insurance,  etc.;  relief  in  case  of 
default;  specifications  as  to  attachment  of 
plates;  recording  of  contract  of  lease,  etc.; 

L  82  3 


"In  Witness  Whereof 


compensation,  duties    and    responsibilities 
of  trustee. 


COLLATERAL  TRUST  BONDS 
In  the  event  that  additional  capital  is  Trustee 

Collateral 
Trust  Bonds 


required,  a  corporation  may  provide  for 


such  financial  requirements  by  an  issue  of 
bonds  secured  by  certain  securities  de- 
posited with  a  trust  company  which  holds 
them  for  the  protection  of  bondholders. 
Such  securities  may  consist  of  unissued 
bonds  of  the  company  which  are  held  in 
the  treasury,  bonds  of  subsidiary  companies 
over  which  the  corporation  holds  control, 
or  securities  which  the  corporation  may 
have  purchased  for  its  investment  account. 

Bonds  based  on  such  security  are  known 
as  Collateral  Trust  Bonds.  Securities  so 
held  or  deposited  usually  consist  of  stocks 
or  bonds  whose  market  value  provides  a 
satisfactory  margin  of  safety  over  the 
amount  of  Collateral  Trust  Bonds  issued 
thereon.  The  value  of  such  bonds  depends 
not  alone  upon  the  securities  deposited, 
but  also  upon  the  financial  and  business 
standing  of  the  issuing  corporation. 

Upon  instructions  from  the  company,  the 
trustee  may  collect  interest  or  dividends 
due  on  securities  deposited  as  collateral, 

83  : 


The  Fidelity  Trust  Company  of  Buffalo 

Trustee        and  collect  maturing  or  called  bonds  in 
addition  to  its  duty  as  custodian  of  the 

Trust  Bonds 

securities.  Title  thereto  is  vested  in  the 
trustee,  who  is  provided  with  powers  of 
attorney  so  that  the  deposited  securities 
may  be  transferred  if  necessary.  It  is  fre- 
quently provided  that  pieces  of  collateral 
may  be  released  for  sale  or  redemption  upon 
substitution  of  satisfactory  securities  or 
other  property  of  like  value,  or  upon  the 
retirement  of  an  equitable  proportion  of 
bonds  outstanding. 

Particular  care  should  be  given  to  the 
proper  drafting  of  a  trust  agreement  for 
therein  may  rest  to  a  considerable  degree 
the  safety  and  protection  of  the  bond- 
holders' investment.  The  trust  indenture 
usually  contains  the  names  of  parties  there- 
to (the  issuing  corporation  and  trust  com- 
pany which  acts  as  trustee);  amount,  de- 
nomination and  term  of  the  issue;  speci- 
men form  of  the  proposed  bond,  coupon 
and  trustee's  certificate;  schedule  listing 
and  describing  securities  deposited  as  col- 
lateral; certificate  by  officers  of  corpora- 
tion to  effect  that  all  formalities  of  law 
incident  to  legality  of  the  issue  have  been 
complied  with;  assignment  of  collateral 
to  trustee;  terms  and  conditions  incident 

[    84    ] 


"In  Witness  Whereof 


to  certification  and  delivery  of  bonds  by  Trustee 
trustee  upon   corporation's  order;    provi- 

\  r  .  Trust  Bonds 

sion  for  issue  of  interim  or  temporary 
certificates  if  necessary;  provisions  for 
registration  of  bonds;  specifications  as  to 
care,  release  and  substitution  of  collateral 
or  retirement  of  bonds  in  event  of  sale  of 
collateral  released;  sinking  fund  and  re- 
demption provisions;  terms  and  conditions 
of  relief  in  event  of  default  in  interest, 
sinking  fund  or  principal  payments;  defi- 
nition of  duties  and  responsibilities  of 
trustee;  provision  for  resignation  of  trustee 
and  appointment  of  successor;  compensa- 
tion of  trustee;  proper  execution  by  parties 
thereto. 

DEBENTURE  BONDS 

This  caption  is  applied  to  the  class  of  Trustee 
bonds  which  is  a  general  obligation  of  the 
issuing  corporation  not  secured  by  a  pledge 
or  lien  on  specific  property.  Such  bonds  are 
promissory  notes  and  have  for  their  security 
the  financial  strength  and  credit  standing 
of  the  corporation  thus  obligated.  The 
trust  agreement  must,  of  course,  be  properly 
constructed  in  order  to  offer  the  necessary 
protection  to  bondholders. 

Debenture    bonds    may    be    issued    for 

E  85  : 


Debenture 
Bonds 


The  Fidelity  Trust  Company  of  Buffalo 

Trustee  various  reasons.  Perhaps  tangible  proper- 
ties are  already  subject  to  liens  which 
prevent  further  obligations  of  that  nature, 
or  if  permitted,  which  would  make  sub- 
sequent issues  junior  in  standing  with  but 
little  more  security  than  a  general  obligation 
of  the  company.  In  a  commercial  transac- 
tion of  considerable  magnitude  requiring  a 
large  sum  of  money  for  say  three  to  five 
years,  a  corporation  might  find  it  less 
expensive  to  issue  debenture  bonds. 

Realizing  that  this  type  of  bond  is  ordi- 
narily not  so  popular  with  investors  as  one 
secured  by  a  lien  on  specific  property, 
corporations  endeavor  in  various  ways  to 
make  them  attractive.  To  strengthen  the 
security  of  debenture  bonds  it  may  be  stipu- 
lated that  no  further  funded  indebtedness 
will  be  permitted  without  equally  securing 
debentures  thereunder,  no  dividends  to  be 
paid  until  after  interest  on  bonds  has  been 
satisfied,  a  certain  proportion  of  bonds  to 
be  retired  annually.  To  appeal  further  to 
investors  such  bonds  may  contain  certain 
provisions  for  maintenance  of  a  minimum 
ratio  between  current  assets  and  current 
liabilities,  may  assure  attractive  income 
return,  and  may  be  convertible  into  stock 
of  the  corporation. 

n  SG  3 


"In  Witness  Whereof 


When  such  an  issue  is  used  to  expand  the  Trustee 
facilities  of  the  corporation,  the  security  is 
enhanced  by  the  greater  value  of  the 
property  as  a  whole,  as  well  as  by  possible 
increased  earning  power.  The  purpose  of 
an  issue  of  debenture  bonds  would,  there- 
fore, seem  to  be  of  importance  from  the 
bondholders'  standpoint. 

In  convertible  debenture  bonds  the  con- 
version privilege  is  exercised  by  depositing 
bonds  with  the  trustee,  who  is  usually 
required  to  make  proper  adjustments  as  to 
accrued  interest  and  dividends  when  the 
exchange  is  effected.  In  bonds  of  this 
nature  the  trustee's  duty  lies  not  in  the 
care  and  custody  of  property,  but  rather  as 
a  vehicle  to  facilitate  the  issue  and  to  pro- 
vide a  convenient  means  for  concerted 
action  on  the  part  of  bondholders,  in  addi- 
tion to  its  other  duties. 

The  trust  agreement  is  of  particular  im- 
portance in  securities  of  this  nature  and  it 
is  impossible  to  lay  too  much  emphasis  on 
the  necessity  of  careful  consideration  of  all 
details  when  the  indenture  is  being  con- 
structed. Some  of  the  points  to  be  con- 
sidered are:  the  amount,  period  of  duration 
and  denomination  of  the  issue;  interest 
return;  form  of  bonds  and  coupons; 

n  87  : 


The  Fidelity  Trust  Company  of  Buffalo 

certification  and  delivery  of  bonds  by 
trustee;  provisions  for  issue  of  interim 
certificates  if  necessary;  tax  exemption 
features  if  any;  sinking  fund  provisions  if 
any;  registration  privilege;  certificate  by 
president  and  secretary  or  other  responsible 
officers  of  corporation  to  the  effect  that  all 
steps  have  been  taken  to  make  the  issue  a 
legal  obligation  of  the  corporation;  pro- 
visions as  to  future  obligations  of  company, 
funded  or  otherwise;  duties  and  responsi- 
bilities of  trustee;  payment  of  taxes, 
insurance  and  upkeep  of  property  by  cor- 
poration; terms  and  conditions  of  re- 
demption; remedy  in  case  of  default;  pro- 
visions for  appointment  of  successor  in 
event  that  trustee  resigns;  compensation  of 
trustee. 


SAFE  KEEPING  AGENT 


Agent 


SAFE  KEEPING  AGENT 

SOMETIMES  in  the  case  of  a  corporation  safe 
which  has  accumulated  liquid  reserves  Keeping 
for  specific  purposes  securities  may  have 
been  purchased  and  locked  up  in  a  safe  de- 
posit box.  Subsequently  certain  of  the  se- 
curities may  have  been  called  for  redemp- 
tion, and  interest  is  lost  because  the  bonds 
have  not  been  promptly  redeemed;  or  loss 
may  be  occasioned  if  coupons  have  become 
due  and  have  not  been  clipped  and  presented 
for  payment.  It  frequently  happens  that 
negotiable  notes  or  other  documents  may 
be  located  in  the  box,  and  one  or  more  of 
them  may  have  matured  in  the  absence  of 
responsible  officers.  Possibly  maturing  notes 
have  not  been  presented  for  payment  when 
due,  and  the  corporation  may  suffer  con- 
siderable loss  as  a  result. 

A  surplus  fund  may  be  invested  in  securi- 
ties worth  hundreds  of  thousands  of  dollars, 
and  yet  the  company  may  not  feel  justified 
in  the  outlay  necessary  to  obtain  compre- 
hensive and  reliable  financial  services  from 
one  or  more  of  the  many  excellent  statisti- 
cal bureaus.  How  much  less  then  would 
an  organization  having  a  smaller  surplus 

[   91   1 


The  Fidelity  Trust  Company  of  Buffalo 

account  be  able  to  afford  such  an  outlay! 
Yet  it  is  of  the  utmost  importance  to  safe- 
gen  guard  this  investment. 

Trust  companies  have  developed  a  service 
of  far  reaching  importance  to  corporations 
whose  surplus,  reserve,  or  profit  and  loss 
account  is  invested  in  securities.  The 
service  is  known  as  "Safe  Keeping  Service/3 
When  securities  are  lodged  in  this  depart- 
ment the  trust  company  gives  its  receipt 
for  them  and  assumes  the  responsibility  for 
their  physical  safety.  Ownership  certifi- 
cates are  signed,  coupons  are  collected  by 
the  trust  company  when  due,  and  the 
amount  collected  is  credited  to  the  corpora- 
tion's account.  At  the  same  time  notice  to 
that  effect  is  mailed  to  the  corporation. 
Notes  are  presented  for  payment  on  the 
date  they  mature.  Mortgage  interest  is 
collected  promptly  when  due.  If  a  surplus 
account  should  be  composed  of  stock,  the 
dividends  are  collected.  In  the  case  of 
default,  an  inquiry  is  made  to  ascertain  the 
cause,  and  this  information  is  promptly 
communicated  to  the  corporation  whose 
account  is  thus  concerned. 

In  the  case  of  stock  rights  the  trust  com- 
pany will  endeavor  to  notify  the  corporation 
of  these  facts,  and  will  be  prepared  to  carry 

E  92  : 


"In  Witness  Whereof1 


out  any  instructions  with  respect  to  the 
rights  in  question. 

Any  security  in  the  safe  keeping  account 
may  be  sold  upon  the  corporation's  order. 
If  the  responsible  officers  of  a  corporation 
were  abroad  and  decided  to  sell  any  of  its 
securities,  this  could  easily  be  accomplished 
by  cabling  the  trust  company  in  code  an 
order  to  sell  at  the  market  price.  Or  securi- 
ties could  be  bought  in  like  manner  by 
cabling  an  order  to  purchase  at  the  market 
price.  In  the  former  case  the  sale  would  be 
executed  and  the  corporation's  account 
credited.  In  the  latter  case  the  purchase 
would  be  made  and  the  account  charged. 

At  least  twice  annually  a  review  is  made 
of  every  security  in  the  account,  and  the 
corporation  will  receive  a  letter  from  the 
trust  company  apprising  it  of  the  condition 
of  all  securities  in  its  account.  If  unusual 
information  should  be  received  concerning 
any  security  in  the  account,  it  is  promptly 
communicated  to  the  corporation. 

It  may  be  well  to  add  that  the  well  or- 
ganized trust  company  receives  virtually 
every  financial  journal,  publication  and 
service  of  importance,  and  is  therefore  in  an 
excellent  position  to  become  acquainted 
with  practically  all  investment  information 

E   93    H 


The  Fidelity  Trust  Company  of  Buffalo 

available.  There  is  small  likelihood  that 
any  called  bond  would  escape  the  trust 
company's  observation,  while  it  might  be 
comparatively  easy  for  a  notice  to  escape 
the  attention  of  the  average  individual. 

The  treasurer  of  the  average  corporation 
can  well  afford  to  spend  his  time  on  other 
matters  requiring  his  special  supervision 
and  delegate  the  care  of  his  surplus  account 
to  a  trust  company  where  it  will  be 

(1)  Instantly  accessible  at  all  times; 

(2)  In  hands  responsible  for  its  physical 
safety; 

(3)  Under  the  observation  of  investment 
experts; 

(4)  Safeguarded  by  an  agent  in  close  con- 
tact with  practically  every  important 
financial  journal  and  service; 

(5)  Subject  to  prompt  attention  in  con- 
nection with  the  collection  of  securi- 
ties, dividends,  interest  and  coupons; 

(6)  In  the  care  of  a  custodian  who  neither 
dies  nor  takes  a  vacation; 

(7)  Free  from  all  clerical  work  so  far  as 
the  corporation  is  concerned. 


E   94  3 


DEPOSITARY 

UNDER   REORGANIZATION 
PLAN 


»••-/* ""vr^r.         "  /"!2rt»  c"v.    X&'-    ••'"'>  V 


DEPOSITARY  UNDER  REORGANI- 
ZATION PLAN 


w 


"HEN  default  of  interest  is  made  in  con-  Depositary 
nection  with  a  mortgage  on  improved 


real  estate  of  modest  value,  foreclosure 
proceedings  are  instituted  and  the  property 
is  sold.  Theoretically,  a  mortgage  on  a 
residence  is  the  same  as  that  on  the  property 
of  a  huge  industrial  concern,  a  railroad  or  a 
public  utility  corporation.  A  residence, 
however,  may  be  readily  sold  and  the  mort- 
gage satisfied;  while  the  value  of  a  mortgage 
covering  the  real  property  and  equipment  of 
an  industrial  corporation,  a  railroad  or  pub- 
lic utility  corporation,  lies  in  the  continued 
profitable  operation  of  the  company.  Any 
disintegration  of  its  essential  elements  would 
jeopardize  the  value  of  the  property  and 
consequently  the  obligation  secured  by  it. 
Therefore,  in  the  event  that  default  of  in- 
terest or  principal  occurs,  a  Protective  Com- 
mittee may  be  formed  which  is  composed 
of  individuals  or  institutions  who  are  largely 
interested  in  the  defaulted  bonds.  The  Pro- 
tective Committee  may  decide  upon  a  plan 
for  continued  operation,  or  in  some  cases 
upon  a  reorganization  of  the  corporation. 

E    97   ] 


Reorganiza- 


The  Fidelity  Trust  Company  of  Buffalo 

The  securities  are  lodged  with  a  respon- 
s^e  depositary,  usually  a  trust  company, 
Plan  which  issues  Certificates  of  Deposit  in  ex- 
change for  them.  If  the  bonds  have  been 
listed,  provisions  may  be  made  whereby  the 
Certificates  of  Deposit  are  also  listed  on  the 
Stock  Exchange.  The  permanent  certifi- 
cates give  a  full  description  of  the  security 
deposited,  and  also  specify  the  terms  and 
conditions  under  which  deposit  was  made, 
as  well  as  the  conditions  attending  issue  of 
the  Certificates  of  Deposit. 

If  it  is  proposed  to  continue  the  business 
every  effort  will  be  made  to  rehabilitate  the 
corporation  and  increase  its  earnings  to  a 
point  where  fixed  charges  on  the  present  or 
the  proposed  funded  obligations  are  fully 
satisfied.  When  this  object  is  accomplished 
the  property  will  be  turned  back  to  the 
corporation.  If  assessments  are  made  or 
if  a  distribution  of  principal  or  interest  is 
contemplated,  the  certificates  are  presented 
so  that  proper  endorsements  may  be  made 
thereon.  When  the  property  has  been 
restored  to  the  corporation,  Certificates  of 
Deposit  are  recalled  and  the  old  securities 
reissued,  or  proposed  new  securities  given 
in  exchange  therefor. 

In  the  dissolution  of  a  corporation  the 

C   98   3 


11  In  Witness  Whereof 


trust  company  may  be  of  considerable  ser- 
vice. Let  us  assume  that  a  committee  has  {^reraniza 
been  appointed  to  carry  into  effect  a  resolu-  tion  Pian 
tion  to  dissolve,  and  that  a  trust  company 
has  been  appointed  as  depositary.  As  speed- 
ily as  possible  the  committee  will  convert 
into  cash  all  assets  of  the  corporation,  depos- 
iting the  same  with  the  trust  company.  The 
committee  will  give  the  trust  company  a 
list  of  all  creditors  of  the  corporation  and  the 
amount  due  each.  When  and  as  the  deposits 
with  the  trust  company  reach  a  specified 
percentage  of  the  claims,  the  trust  company 
will  ratably  make  distribution  thereof  to 
the  creditors  until  all  claims  have  been  paid 
in  full.  When  the  claims  of  all  creditors 
have  been  satisfied,  deposits  thereafter  will 
be  held  for  distribution  to  stockholders. 
Stock  certificates  may  be  deposited  with  the 
trust  company  in  order  that  any  ratable 
distribution  of  assets  may  be  endorsed 
thereon.  When  the  affairs  of  the  corpora- 
tion have  been  completely  liquidated  a 
certificate  of  dissolution  will  be  filed  with 
the  proper  authorities.  The  committee  will 
thus  be  relieved  of  a  great  amount  of  clerical 
work,  while  creditors  and  stockholders  will 
be  assured  that  all  distributions  have  been 
made  on  an  equitable  basis. 

:  99  n 


The  Fidelity  Trust  Company  of  Buffalo 

Depositary  A  similar  service  may  be  performed  by  a 
under  trust  company  in  the  disintegration  by  a 
large  corporation  of  its  assets  into  two  or 
more  smaller  companies.  In  recent  years 
certain  large  corporations  in  obedience  to 
United  States  Supreme  Court  decrees  or  for 
other  purposes  have  found  it  advisable  to 
carry  out  such  a  program. 

Certain  corporations  adopted  plans  sub- 
stantially as  follows.  A  committee  was 
appointed  to  carry  into  effect  the  plans 
agreed  upon.  A  trust  company  was  ap- 
pointed as  depositary.  Notices  were  sent 
by  the  committee  to  stockholders  advising 
them  of  the  program  agreed  upon  and 
directing  all  holders  of  common  and  pre- 
ferred stock  to  deposit  their  securities,  fully 
and  properly  endorsed,  with  the  trust  com- 
pany or  depositary  on  or  before  a  specified 
date.  It  was  also  explained  that  shares  of 
common  and  preferred  stock  in  the  new 
corporations  to  be  formed  would  be  given 
in  exchange  for  those  deposited.  The  num- 
ber of  shares  to  be  given  in  exchange  was 
computed  by  the  depositary,  and  for  all 
fractional  parts  of  a  share  warrants  were 
issued  to  stockholders.  Such  warrants 
could  be  cashed  by  the  depositary,  or  shares 
would  be  given  in  exchange  for  sufficient  of 

L  100  n 


"In  Witness  Whereof 


the  warrants  to  equal  the  par  value  of  Depositary 
shares  thus  exchanged.     Similar  arrange- 

,          .  ,  ,  Reorgamza- 

ments  were  made  with  respect  to  the  ex- 
change  of  bonds.  The  depositary  made 
proper  adjustment  on  account  of  accrued 
interest,  where  interest  dates  in  the  bonds 
deposited  differed  from  those  of  bonds  given 
in  exchange  therefor.  This  adjustment 
was  paid  in  cash  by  the  trust  company.  All 
redeemed  stocks  and  bonds  were  cancelled 
by  the  depositary  and  destroyed. 

In  the  consolidation  of  two  or  more  cor- 
porations we  have  a  situation  which  is  prac- 
tically the  antithesis  of  that  above  recited, 
in  that  securities  of  several  corporations  are 
deposited  in  exchange  for  those  of  a  single 
corporation.  The  duties  required  of  the 
depositary,  however,  are  virtually  the  same. 

In  some  instances  the  depositary  has  also 
performed  many  services  for  the  committee 
in  the  nature  of  mailing  notices  and  reports 
to  stockholders,  bondholders,  etc.  With  its 
organization  these  duties  can  be  discharged 
by  the  trust  company  with  far  less  expense 
to  the  corporation.  All  duties  of  the  deposi- 
tary as  well  as  the  terms  and  conditions 
incident  thereto  will  be  fully  defined  in  the 
deposit  agreement  between  the  corporation 
and  trust  company. 

:  101  : 


DISBURSING  AGENT 


DISBURSING  AGENT 

UNTIL  a  few  years  ago  it  was  the  general  Disbursing 
practice  for  corporations  to  make  out  Agent 
and  mail  individual  dividend  checks  to  the 
various  stockholders.  It  was  also  their  cus- 
tom to  pay  coupons  and  interest,  and  to 
redeem  bonds  at  maturity.  The  corporation 
which  sent  out  individual  dividend  checks 
encountered  numerous  obstacles.  It  was 
difficult  to  maintain  the  correct  addresses  of 
individual  stockholders.  Dividends  from 
certain  stocks  might  be  ordered  paid  to  an 
individual  not  registered  as  owner  of  such 
stock  on  the  books  of  record.  Frequently 
stock  which  is  active  on  the  exchange  is 
issued  in  what  are  called  "street  shares/' 
i.  e.,  in  the  name  of  a  broker  whose  firm  and 
official  signatures  are  so  well  known  that 
transfer  of  the  shares  is  not  required  in 
every  sale.  If  a  broker  buys  such  shares 
for  the  account  of  several  customers  he 
may  hold  only  one  of  such  certificates  to 
cover  several  purchasers'  accounts.  If  he 
should  fail  to  credit  one  of  his  clients  with 
interest  or  dividends  when  due  the  customer 
might  write  to  the  corporation  and  de- 
mand payment.  This  would  necessitate  an 

i  105 


The  Fidelity  Trust  Company  of  Buffalo 

investigation.  The  corporation  not  accus- 
tomed to  such  circumstances  would  experi- 
ence considerable  difficulty  in  locating  an 
error. 

In  making  out  dividend  checks,  corpora- 
tions may  neglect  to  take  necessary  pre- 
cautions, and  the  checks  may  be  raised  or 
otherwise  fraudulently  tampered  with.  If 
individuals  who  check  up  dividend  pay- 
ments are  not  accustomed  to  the  various 
methods  of  fraud  employed  by  nefarious 
operators,  a  corporation  may  suffer  con- 
siderable loss. 

In  the  payment  of  coupons  and  in  the 
redemption  of  called  or  matured  bonds,  the 
amount  of  clerical  work  involved  is  infinitely 
greater  than  that  required  for  the  payment 
of  dividends.  In  undertaking  work  of  this 
nature  the  corporation  must  see  that  all 
coupons  presented  are  accompanied  by  the 
proper  ownership  certificates,  filed  by  the 
owner  of  the  security,  as  required  by  regu- 
lations of  the  Internal  Revenue  Bureau. 
Very  frequently  holders  of  bonds  which  are 
subject  to  call  fail  to  see  the  published 
notice  calling  certain  bondk  for  redemption. 
In  such  instances  great  care  must  be  exer- 
cised to  prevent  the  payment  of  coupons 
detached  from  such  bonds.  Frequently  the 

n  106  3 


"In  Witness  Whereof 


return  of  the  coupon  is  the  first  notice  the  Disbursing 
holder  may  have  that  one  of  his  bonds  Agent 
has  been  called.    Occasionally  interest  on 
registered  bonds  is  payable  only  on  the 
order  of  the  registered  owner,  and  care 
must  be  used  to  see  that  an  order  directing 
the  payment  of  interest  has  been  received 
before  payment  is  made. 

It  can  easily  be  understood  that  a  consid- 
erable amount  of  clerical  help  is  required  to 
discharge  the  duties  of  a  paying  or  disburs- 
ing agent.  When  one  takes  into  account  the 
knowledge,  caution  and  diligence  that  must 
be  exercised  by  such  a  department  it  can  be 
observed  that  the  ordinary  clerk  cannot 
qualify  for  such  work.  In  addition  to  the 
skill  required,  a  disbursing  agent  must  have 
an  accurate  knowledge  of  various  State  and 
Federal  Laws,  particularly  those  which 
regulate  Income  Taxes. 

A  complete  system  of  files  and  records  is 
necessary  in  order  to  facilitate  the  work  and 
at  the  same  time  protect  the  corporation's 
interests.  Where  a  limited  amount  of  this 
business  is  handled,  proper  care,  diligence 
and  talent  are  usually  sacrificed,  always  of 
course,  at  the  expense  of  the  corporation 
concerned.  To  avoid  routine  and  clerical 
help,  and  to  safeguard  themselves  against 

:  107  : 


The  Fidelity  Trust  Company  of  Buffalo 

Disbursing     loss  through  error,  lack  of  knowledge  and 

Agent          the  absence  of  a  proper  system  of  records, 

corporations  are  assigning  these  duties  to 

the  trust  department  of  a  well  organized 

trust  company. 


E  108 


VOTING  TRUSTEE 


§•'•   <~">*^V^  •    -^^  \  r» \*\ 

kf    ••  f        *     *fc  IP*         •    ^.^A^ 


VOTING  TRUSTEE 

IN  the  reorganization  or  consolidation  of  voting 
corporations  it  is  frequently  desirable Trustee 
that  certain  management  be  retained.  To 
insure  the  continuation  of  a  particular  board 
of  directors  or  managers,  stockholders  may 
enter  into  a  Voting  Trust  Agreement  where- 
by the  stock  is  endorsed  over  to  a  trustee 
during  the  term  of  the  agreement.  When 
the  stockholders  surrender  their  certificates 
they  receive  beneficial  certificates  from  the 
trustee  whereby  they  are  entitled  to  all  ben- 
efits that  may  arise  from  the  stock  while  the 
trust  agreement  is  effective.  Aside  from  the 
custody  of  the  stock,  the  trustee's  only  duty 
under  such  an  arrangement  is  the  voting 
of  stock  deposited  in  accordance  with  the 
terms  of  the  agreement.  Such  a  trust  agree- 
ment is  confined  to  a  period  of  five  years  in 
this  State.  When  the  trust  agreement  ex- 
pires, stockholders  surrender  their  trustee 
certificates  for  new  certificates  representing 
shares  of  stock  in  the  corporation  concerned. 
Stockholders  may  also  resort  to  a  similar 
arrangement  when  their  interests  are  jeop- 
ardized by  an  effort  on  the  part  of  certain 
factions  to  gain  control. 

E  in  ] 


The  Fidelity  Trust  Company  of  Buffalo 

voting  When  a  preferred  stock  or  bond  issue  is 

Trustee  about  to  be  placed  on  the  market  an  ar- 
rangement of  a  similar  nature  may  be  pro- 
posed, giving  the  holders  of  preferred  stock 
or  bonds  the  right  to  choose  the  manage- 
ment until  dividends  or  interest  have  been 
regularly  paid  for  a  period  of  successive 
years,  or  giving  the  security  holders  the 
right  to  choose  the  management  if  the 
company  shall  fail  at  any  time  to  pay 
dividends  or  interest  regularly  for  a  num- 
ber of  consecutive  years. 

Corporations  choose  trust  companies  to 
fulfill  these  duties  because  of  their  responsi- 
bility and  familiarity  with  the  subject. 


[    112   1 


ESCROWS 


ESCROWS 

N  escrow  has  been  described  as  a  deed,  Escrows 

bond  or  other  written  engagement  de- 
posited with  a  third  party  to  be  delivered 
by  him  to  the  grantee  only  upon  the  per- 
formance or  fulfillment  of  some  condition 
within  a  specified  time. 

In  general  practice  escrows  contemplate 
comparatively  brief  periods  of  time,  and 
instruments  so  deposited  are  usually  beyond 
recall  during  that  period. 

Escrows  may  be  created  for  various  pur- 
poses, for  instance  when  a  piece  of  real 
estate  is  sold  on  installments  the  deed  may 
be  placed  in  escrow  until  all  payments  have 
been  deposited  with  the  escrow  holder. 
This  is  particularly  convenient  when  the 
owner  of  property  lives  in  a  State  or  country 
foreign  to  that  in  which  the  real  property  is 
located. 

In  the  construction  of  a  building  or  other 
contract  work,  funds  are  frequently  de- 
posited in  escrow,  payments  to  be  made  at 
various  stages  of  progress  in  the  completion 
of  work  under  contract. 

When  a  corporation  proposes  an  issue  of 
common  or  preferred  stock  the  securities 

E  H5  3 


The  Fidelity  Trust  Company  of  Buffalo 

Escrows  may  be  deposited  in  escrow  to  be  ratably 
delivered  to  underwriters  when  and  as  they 
shall  have  made  deposits  in  payment  there- 
for with  the  escrow  holder. 

The  above  are  only  a  few  of  the  many 
purposes  for  which  escrows  may  be  created. 
In  the  custody  and  delivery  of  instruments 
or  other  property  so  deposited,  holders  of 
escrows  are  governed  by  specific  directions, 
and  will  therefore  insist  that  all  conditions 
be  in  writing,  not  verbal,  and  that  said 
conditions  be  entirely  clear  and  not  subject 
to  more  then  one  possible  interpretation. 

In  selecting  the  holder  or  depositary  of  an 
escrow,  the  interested  parties  will  select  one 
who  is  responsible,  absolutely  trustworthy, 
free  from  prejudice,  and  one  who  is  sure  of 
continued  existence  in  order  that  the  pur- 
pose of  the  escrow  may  be  fully  realized. 

The  following  is  a  quotation  from  John 
H.  Sears  of  the  New  York  Bar.  "The 
organization  of  the  trust  company,  with  its 
long  life,  its  ability  to  surrender  its  contracts 
to  successors  upon  expiration  of  its  life,  its 
being  supervised  under  strict  regulation, 
and  its  many  other  safeguards  in  respect  to 
the  care  and  custody  of  property,  and  espe- 
cially the  making  of  such  care  and  custody 
features  of  business  under  specific  charter 

L  lie  3 


"In  Witness  Whereof 


provisions,  seems  not  only  for  the  business  Escrows 
world  but  also  for  private  interests,   an 
agency  for  the  carrying  out  of  escrow  agree- 
ments of  a  peculiarly  fit  nature,  and  also  of 
agreements  in  the  nature  of  escrow/ ' 


E  H7  3 


RECEIVER-ASSIGNEE 

A  CORPORATION  sometimes  finds  itself  tern-  Re 
J\.  porarily  in  financial  difficulty.  It  is 
not  a  question  of  insolvency,  but  a  condition 
which  perhaps  will  become  rectified  if 
ample  time  is  allowed.  To  prevent  a  forced 
liquidation  under  adverse  circumstances  a 
friendly  receiver  is  sometimes  applied  for 
by  a  corporation,  and  the  court  of  proper 
jurisdiction  will  usually  grant  such  a  request 
if  satisfied  as  to  the  justice  of  such  a  pro- 
cedure. 

Officials  of  a  successful  corporation  may 
for  some  reason  become  involved  in  a  con- 
troversy with  the  stockholders,  or  members 
of  a  partnership  may  become  engaged  in  an 
argument  which  among  themselves  cannot 
be  amicably  settled.  In  either  of  these 
events,  the  parties  interested  may  seek  the 
appointment  of  a  receiver  to  make  an  ad- 
justment. Or  a  corporation  may  actually 
be  in  a  state  of  insolvency,  and  creditors 
thereof,  to  prevent  further  depletion  of  the 
company's  resources,  and  also  to  provide 
for  a  fair  and  equitable  distribution  of 
assets  among  all  creditors,  may  petition 
the  court  for  the  appointment  of  a  receiver 

E  121  : 


The  Fidelity  Trust  Company  of  Buffalo 


Receiver  for  the  insolvent  corporation.  The  acting 
receiver  may  carry  on  the  business,  subject 
of  course,  to  certain  legal  restrictions.  In 
the  conduct  of  the  corporation's  affairs,  the 
receiver  will  naturally  avail  himself  of  all 
possible  information  and  knowledge  at  the 
disposal  of  its  officers.  If  the  difficulty  has 
arisen  through  temporary  lack  of  capital, 
a  trust  company  is  in  a  position  to  advance 
funds,  if  satisfactory  security  can  be  pro- 
vided, to  tide  the  affairs  of  the  corporation 
over  a  short  depression.  This  may  enable 
the  corporation  to  recover. 

A  voluntary  assignment  of  all  its  property 
may  be  made  by  a  corporation  for  the  bene- 
fit of  its  creditors,  and  such  an  assignment, 
if  general  in  character,  is  generally  recog- 
nized by  State  courts.  Frequently  such 
action  is  taken  at  the  urgent  request  of  the 
corporation's  creditors.  In  either  case,  it  is 
accomplished  by  a  deed  of  assignment. 
The  conveyance  is  acknowledged  and  re- 
corded in  the  office  of  the  clerk  of  the 
county  wherein  the  debtor  resides  or  carries 
on  his  business. 

An  assignment  is  attended  by  the  im- 
mediate transfer  of  all  property  concerned. 
All  claims  must  be  filed  and  proved  if  neces- 
sary by  an  order  of  the  court. 

:  122  : 


"In  Witness  Whereof' 


The  assignee  will  be  guided  by  certain  Assignee 
elements  of  the  law  and  he  must  give  a 
complete  accounting  of  his  activities.  He 
is  personally  liable  for  and  charged  with 
any  irregular  payments  or  disbursements 
as  well  as  any  loss  arising  through  negli- 
gence on  his  part.  In  liquidating  a  corpora- 
tion through  a  general  conveyance,  the 
assignee  must  satisfy  all  creditors  with  an 
equal  degree  of  fairness.  Due  consideration, 
however,  must  be  given  those  who  hold 
prior  liens  against  the  property.  It  is  also 
incumbent  upon  the  assignee  to  collect  all 
debts  owing  to  the  corporation,  referring 
to  the  court,  if  necessary,  in  order  that  all 
possible  assets  of  the  corporation  may  be 
realized  upon. 

The  obvious  advantages  offered  by  trust 
companies  acting  as  receiver  or  assignee 
were  early  recognized  by  courts.  The  fol- 
lowing extract  is  a  quotation  from  Justice 
Roosevelt  of  the  New  York  Supreme  Court 
in  the  matter  of  the  Empire  City  Bank, 
year  of  1855. 

"As  no  mere  personal  obligation  can  be 
equal  to  the  mortgages  and  public  stocks  to 
the  amount  of  one  million  dollars,  pledged 
as  security  by  the  trust  company,  and  as 
that  institution  has  been  created  by  law, 

123 


The  Fidelity  Trust  Company  of  Buffalo 

among  other  objects,  for  the  express  pur- 
pose of  meeting  such  requirements,  I  feel  no 
hesitation  in  making  a  selection  between 
the  nominees.  Private  preferences  in  this 
as  in  most  other  judicial  acts,  must  yield  to 
public  considerations.  No  man,  and  the 
counsel  of  no  man,  has  a  right  to  complain 
that  he  or  his  particular  friend  is  not  ap- 
pointed a  receiver;  especially  where  the 
assets,  as  in  these  bank  cases,  to  be  entrusted 
to  his  responsibility,  are  counted  not  by 
tens,  but  by  hundreds  of  thousands.  There 
are  absent  parties  interested,  minors  as  well 
as  adults;  and  those  who  rely,  and  have  a 
right  to  rely,  exclusively  and  without  pro- 
fessional intervention  on  the  care  and  vigi- 
lance and  unbiased  judgment  of  the  court." 
Again  in  the  same  case,  "Does  not  every 
order  appointing  a  receiver  contain  by  im- 
plication if  not  expressly,  a  direction  that 
all  funds,  when  collected,  shall  be  kept  in 
some  safe  depository?  The  law,  in  requiring 
as  it  does,  proper  security  from  a  receiver 
in  these  cases  assumes  that,  although  di- 
rected, he  may  not  do  his  duty;  and  it  is 
only  in  such  a  contingency  that  security  is 
of  any  importance.  And  it  dispenses  with 
this  prerequisite  in  the  case  of  the  appoint- 
ment of  the  trust  company,  only  because 

E  124  : 


"In  Witness  Whereof 


its  whole  capital  stock,  property  and  effects  Assignee 
are  by  law  made  absolutely  liable  for  such 
deposits  in  preference  to  all  other  liabili- 
ties/' 


C    125   ] 


THE  MATTHEWS-NORTHRUP  WORKS,  BUFFALO,  CLEVELAND  AND  NEW   YORK 


14  DAY  USE 

RETURN  TO  DESK  FROM  WHICH  BORROWED 

LOAN  DEPT. 


i<>5 

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